Licensed Investment Companies

  • February 20, 2023
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Licensed Investment Companies LICs

Licensed Investment Companies (LICs) –

Licensed Investment Companies are listed companies that invest in other companies.

LICs are a type of investment vehicle that is publicly traded on a stock exchange. LICs are ‘closed-ended’ investment companies.  This means that they have a fixed number of shares outstanding, which are bought and sold on the stock market.

LICs pool money from investors and use it to invest in a diversified portfolio of securities. The portfolio is actively managed by professional fund managers employed by the LIC. The quality of the fund managers is very important for the success of a LIC.

LICs can work for people who can’t or don’t want to analyse and invest directly in various stocks.

Net Asset Value (NAV):
One key feature of LICs is that their share price can trade at a premium or discount to their Net Asset Value (NAV). The NAV represents the total value of the underlying assets held by the LIC divided by the number of shares outstanding. If the share price is higher than the NAV, the LIC is said to be trading at a premium; if it is lower, it is trading at a discount.

Net Tangible Assets (NTA):
LICs often provide estimates of their Net Tangible Assets (NTA) both pre-tax and post-tax to provide investors with a clearer picture of the company’s financial health and performance. Here are some reasons why they do so:

1. Transparency:
LICs aim to provide transparency to their shareholders and potential investors. By disclosing both pre-tax and post-tax NTA figures, they offer a comprehensive view of the company’s assets and financial position. This helps investors make more informed decisions and understand the potential impact of taxes on the company’s performance.

2. Tax Implications:
Taxation can significantly affect a LIC’s financials. Pre-tax NTA represents the company’s net assets before accounting for taxes, while post-tax NTA considers the impact of applicable taxes. This differentiation helps investors evaluate the impact of taxes on the company’s profitability and investment returns.

3. Investor Considerations:
Investors have varying tax obligations based on their individual circumstances. Some investors may have tax-exempt status, while others may have different tax rates or tax benefits. By providing both pre-tax and post-tax NTA figures, LICs cater to investors with different tax situations and enable them to assess the potential after-tax returns more accurately.

4. Comparison with Industry Peers:
Comparing a LIC’s pre-tax NTA to its peers can provide insights into its operational efficiency, investment strategies, and tax management. Similarly, comparing post-tax NTA figures allows investors to assess the company’s performance on an after-tax basis. This comparison helps investors evaluate how effectively the LIC manages taxes and may influence their investment decisions.

Overall, presenting both pre-tax and post-tax NTA figures allows LICs to assist investors in making more informed decisions based on their specific tax considerations and overall investment objectives.

Advantages of investing in LICs:
1. They provide investors with access to a professionally managed and diversified portfolio of investments.
2. LICs can provide liquidity to investors, as their shares can be bought and sold on the stock exchange.
3. LICs often distribute a portion of their investment returns to shareholders in the form of dividends.

Risks of investing in LICs:
1. The value of the underlying investments can fluctuate
2. The share price of a LIC may not always reflect its true value

LICs versus Exchange Traded Funds (ETFs):
1. LICs – their active management style and higher overheads, generally mean higher management costs than ETFs.
2. ETFs – usually have a more passive management style and lower overheads, resulting in lower management costs than LICs.

Do your fundamental research:
You need to thoroughly research the LIC (or any asset for that matter) you are looking to invest in, even if it is trading at a discount.  Remember, past performance is not an indicator of future performance. Check things like:
– Long-term Performance/Track Record;
– Management Fees – are payable regardless of how well the LIC performs eg. 1% of net assets;
– Performance Fees – some LICs don’t charge a performance fee. If they do charge, look for one that only takes a performance fee if they beat the agreed Benchmark eg. Index and make a positive return and increase the NTA of the fund eg. 15-20% of returns above the Index.  BNote, some LICs take a fee even if the fund makes a negative return but beats the set Benchmark.
Dividend Policy & History – eg. are dividends sustainable? fully franked?;
– Profit Reserves – eg. look for LICs that have healthy reserves for the tough years;
– Options;
– Capital Management – eg. when can they issue new shares?;
– Investor Communication – eg. regular reporting and shareholder events

Stock Market Investor Education:
Attending Wealthwise Education’s ‘Invest for Success’ Program helps investors and traders analyse the value of companies (fundamental analysis) and understand how to use trends (technical analysis) for knowing the optimal times to buy, take profits and sell stocks.

‘Invest for Success’ is a 4-week program starting with a 2-day in-person workshop + 4 x 1-hour online sessions over 4 weeks.  It represents outstanding value for this kind of training.  Call us now for more information +61.2.9488.9900.

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