The listed investment company structure has a number of features that make it a superior investment vehicle, including a closed-end pool of capital. During market downturns, this provides a significant benefit to shareholders, particularly when compared with other types of managed funds.
A listed investment company, commonly referred to as a ‘LIC’, provides investors the opportunity to invest in a managed and diverse portfolio of assets (including shares and cash) through a company structure listed on the Australian Securities Exchange (ASX). Investors can buy and sell shares in LICs ‘on market’ like shares in other listed companies.
The LIC structure offers a number of significant benefits to investors. As a listed entity, a LIC must comply with rigorous corporate governance principles that ensure a high degree of transparency and accountability for shareholders. Importantly, a LIC has the opportunity to pay shareholders fully franked dividends over time.
A key advantage of the LIC structure, especially during a market downturn, is its permanent and closed-end pool of capital.
Many other managed investment structures, such as unit trusts, have a capital base prone to fluctuations resulting from redemptions and contributions, while a LIC has a fixed pool of capital. This allows the LIC investment manager to make rational investment decisions based on sound investment principles while taking a long-term view. During a market downturn, a fixed pool of capital as opposed to an open-ended pool of capital is a significant benefit for investors.
In a market downturn, investors in can sell their units to realise cash, forcing the fund manager to liquidate some of their holdings to repay the unit holders – called redemptions. This means the manager is selling into a market that has fallen, and may be forced to sell stocks that they believe are cheap.
In a bull market, when money is rapidly flowing into managed funds, the reverse is the case. The fund manager may be compelled to buy shares they know are over-valued as money pours in from investors – called contributions. This is never the case with LICs. The LIC investment manager can continue to hold the same portfolio of assets, and is never forced to sell or buy any stock to fund redemptions or contributions. Their total focus is on managing money for the benefit of all their shareholders without being dictated by market sentiment or the flow of capital into and out of their fund. LIC investment managers have the opportunity to buy in a market downturn when stocks may be undervalued. Conversely, they may sell stocks that become overvalued in a bull market. Supporters of LICs argue that the closed-end structure enables them to invest more efficiently and outperform unit trusts or other managed funds over time.
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