Recently, we have seen a surge in the number of investors seeking to expand their portfolios to include Listed Investment Companies (LICs). LIC investments have risen in popularity for several reasons, including:
- Instant portfolio diversity
- Exposure to overseas investment markets
- Favourable tax implications, including franked dividends
- Access to professional fund managers
- A more predictable revenue stream
In Your Guide To Listed Investment Companies, we touched on LIC investment basics – let’s take a quick recap.
What is a LIC?
Put simply, a LIC is an investment that has been incorporated as a company and listed on the Australian Securities Exchange (ASX). Many LICs operate in a similar manner to a managed fund, with an internal or external professional fund manager that is responsible for selecting and managing the company’s investments.
How Does a LIC Work?
LICs are closed-ended, meaning that they do not issue new shares or cancel existing shares as investors join or leave. Instead, they issue a fixed number of shares through the process of initial public offering (IPO). Investors can buy and sell these shares on the ASX, allowing the fund manager to focus their investing efforts without the worry of cash flow.
Types of LICs
LICs can generally be categorised into one of four main types, based on their investment style:
- Australian Shares
LICs that are invested in stocks listed on the ASX. - International Shares
LICs that invest predominantly in shares listed on overseas exchanges. - Private Equity Funds
These LICs are considered to be high-risk, with investments in unlisted companies both locally and overseas. - Specialist Funds
LICs that focus on specific industry sectors such as technology, energy, mining, property, infrastructure, or even wineries.
Now, let’s expand further and dive deeper into the ‘hows’ and ‘whys’ of investing in a LIC. For most investors, the primary appeal of a LIC lies in its tax breaks. A LIC provides a steady, tax-effective dividend stream that is highly attractive in today’s volatile economy, attributable to the current global pandemic and low-interest rates. This is known as a fully-franked dividend income.
1. Fully-Franked Dividend Income
Self-managed superannuation fund (SMSF) investors looking to create a reliable, tax-effective income can utilise a trust structure to generate franking (imputation) credits. These can then be passed on to shareholders, minimising their tax liability, and in many cases, even resulting in a tax refund from the ATO. Even LICs with international interests can benefit from franking credits, though generally at lower levels.
Conversely, a unit trust structure (alternative investment options) can only apply franking credits from its investee companies, and must pay out all dividends every financial year. A LIC has the ability to balance out its dividend payments at the director’s discretion, allowing the company to pay out a more predictable dividend stream that increases over time. This makes a LIC a more consistent source of income in retirement.
2. Possible Capital Gains Tax Deductions
In some circumstances, if the LIC you invest with is more of a long-term investor, it can offer you further tax benefits. For example, if it sells investments with capital profit, it could potentially pay a dividend with a Capital Gains Tax (CGT) component. Ultimately earning you a CGT discount as if you directly owned and traded shares in the underlying investee company.
3. A Predictable Revenue Stream For Retirement Planning
Owing to their close-ended capital structure, strategic management styles of LICs’ can also offer a stable fund base to invest in. Allowing you room to plan for retirement and long term investments. LICs with long-term plans enable the professional fund managers to impose lock-in periods and freezes on their revenue gains, allowing reinvestment of profits after payment of due taxes. This strategy helps overcome economic disruptions, especially in the events of inflation or economic recession.
LICs can also choose to hold capital gains from shareholder distribution to be reinvested for higher payouts. If directors use this reinvestment strategy, it allows the opportunity to grow the investor’s retirement package and ensures regular income streams or a lump sum retirement payout.
4. Simple and Affordable
Investing in a LIC is as simple as buying any other stock on the share market. Because they are listed on the ASX, the trading process is straightforward and transparent. Unlike many other managed investments, only a small amount (generally starting at $500) is required to invest in a LIC, and the only fees applicable are the brokerage fees.
5. Portfolio Diversification
LICs provide quite the bang for your buck, with quick and easy access to a varied portfolio for minimal investment, as compared to traditional investment avenues. For example, you can buy into a LIC in one small trade, which may see you with shares in property, international stocks, mining and technology in the one transaction. This diversification also cushions your investment from market volatility and increases the chance of securing sustainable and consistent income streams from your portfolio.
6. Accountability & Transparency
Another benefit that investors find appealing when it comes to LICs, is the transparency associated with being governed by the ASX regulations and their corporate structure. The Australian Securities Governance Rules require that directors are accountable with full disclosure to shareholders, this is done by placing a three-part threshold that LICs are required to fulfil. It ensures reliability with rules such as:
- A shareholders’ right to vote in an Annual General Meeting Resolutions and Special General Settings.
- ASX Listing and Corporate Shareholder Transparency Rules that necessitate shareholder communication and full disclosure.
- Annual, quarterly and monthly investment reporting to shareholders on net tangible assets and investment portfolios.
Having this threshold in place provides shareholders with a clear overview of where their money is going, and how their assets are performing at all times.
Your Takeaway
As you can see, investing in a LIC comes with many rewards, given you do the groundwork and are prepared to commit to a long-term investment plan for maximum benefits. There are many ways to plan your financial investments, but the first step is investing with the right financial advisor. For assistance in investing with a Listed Investment Company, take advantage of our obligation-free consult OR contact Super Network Financial Services to learn about the many investments and super strategies that could be right for you.
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