What are Listed Investment Companies & Listed Investment Trusts?

Generally, LICs operate in a similar manner to managed funds, but there are some core differences:

• Shares in a LIC can be bought and sold like any publicly listed business. On the Australian Securities Exchange the minimum amount for an initial investment is $500. This compares to managed funds which generally have much higher minimum initial investments and require the completion of application forms or use of an investment platform when individual investors seek to purchase units.
• LICs are closed-ended investments. This means when a LIC is launched a fixed number of shares are issued in an initial public offering. Those shares are then traded in a secondary market (buyers purchasing shares from sellers on an exchange). Because of this, the share price of a LIC can trade at a discount or premium to the value of its Net Tangible Assets (NTA) according to investor demand. On the other hand, managed funds are open-ended meaning there’s no limit to the number of units available. When an investor invests in a managed fund the fund manager issues new units, priced at the value of NTA. So, the fund’s size expands and contracts in line with units being bought or redeemed.
• LICs can offer exposure to more asset classes. The closed-ended structure of LICs enables investment managers to hold more illiquid assets such as corporate loans and private equity. This is because shares are traded on secondary markets and don’t require the sale of assets or drawdown of cash when redemptions are made, like in the case of managed funds.

The portfolio of a listed investment company can be managed internally or by an external manager appointed by the company’s board.

Listed Investment Trusts (LITs) are very similar to LICs. They’re closed-ended, units are traded on an exchange and they aim to generate wealth for investors through a professionally managed underlying portfolio of assets.

The main differences between LICs and LITs lie in the business structure. Because a LIT is registered as a Trust, there are different taxation rules when compared to Companies. Notably, Trusts are required to distribute all income while LICs can dictate the level of income (dividends) paid to shareholders based on the company’s investment objectives. There are various pros and cons to each structure which ultimately depend on the individual investors’ circumstances and needs.

Various LICs and LITs specialise in different asset classes, represented in the underlying portfolio. The main asset classes of LICs and LITs available in Australia include:

• Australian Shares
• Global Shares
• Corporate Debt/Fixed Income
• Private Equity