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Benefits of Listed Investment Companies

Listed Investment Companies are similar to managed funds but differ in important ways that allow for long term investment, low fees and fully franked dividends.

AFIC, along with other listed investment companies, has what is termed ‘a closed end’ structure. This means the number of shares on issue is fixed and set by the Board from time to time.

As a result, AFIC does not issue new shares or cancel them as investors enter and leave the investment fund. This allows us to concentrate on the performance of the portfolio invested over the longer term without having to provide for continuous inflows or outflows of monies.

The "closed end" structure also removes the motivation to shadow indices and we can therefore take a much longer term approach to our investment horizon. The costs of administering the fund are also reduced as we are not continually issuing and redeeming units in the fund.

This structure also provides AFIC with the ability to pay franked dividends out of after tax realised profits and interest and franked dividends received on its underlying investments.

Speakers
  • Geoffrey Driver, General Manager Business Development and Investor Relations
  • Ross Barker, Managing Director, AFIC
  • Mark Freeman, Chief Investment Officer
Brief Synopsis

Senior AFIC staff members provide an overview of the benefits of investing with AFIC

Ross Barker:  Listed investment companies are pooled investment vehicles that were structured as companies rather then as trusts.

Geoffrey Driver:LIC's are like any other company, like BHP or Woolworths. They have their own separate boards, their own government structure.

They're very similar to other managed funds, in that their pooled investment vehicles, professional managed a range of investment strategies. There's also a number of differences, and one of the major differences for listed investment companies to manage funds, is that listed investment companies or LICs are a closed ended vehicle.

RB: When an investor makes an investment in a listed investment company, they buy or sell units on the market. But trading of those units doesn't impact the size of the overall portfolio. In the case of managed funds, if an investor makes an application or a redemption, that will impact the size of the underlying portfolio., because it's creating new inflows and outflows.

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RB: There are really two major categories. The older ones tend to take a longer term view to their investments, whereas the ones that are more recent, that are set up in conjunction with fund managers, they tend to have a higher turnover of the shares that they invest in, and have a shorter term focus.

GD: AFIC obviously invest in Australian equities, there are other LICS out there who specialise in high dividend yield.

Smaller midcaps, microcap strategies, there's long and short strategies.

GD: I think they've grown substantially over the last few years because fund managers are quite attracted to the idea of having a closed or fixed amount of funds to invest. So that gives them the ability to actually invest for the long term without having to worry about inflows and outflows of funds from investors who sort of change their mind because of different cycles within the market.

Mark Freeman: The investment company structure is a closed end structure, which means we don't have redemptions on a regular basis, we're not out issuing new units to try and bring money into the fund, we can actually be investors in companies as opposed to being traders in companies, which has really been the backbone of what we're about.

RB: The costs incurred with the management of the portfolio tends to be in the range of about .15 to .25 percent, whereas other pooled investment vehicles, such as trusts, often have fees as high as one-and-a-half percent, so there's a big difference in fees.

GD: Taxation profile of AFICs very different from unit trust. For AFIC for example, all of it's income is primarily fully frank dividends, any other income that we receive is actually taxed at the company tax rate, so in a sense we can actually pay that out as fully frank dividends. So you find that all of the returns to shareholders either come in the form of fully frank dividends, or what they call listed investment company capital gains.

MF: The investors in those trusts don't really know what their return is until they get the final tax bill.

MF: Our long term view, our by and hold approach means that our turnover is very low.

RB: You don't pay the capital gains tax, you've got the benefit of the capital gain working for you and earning a dividend, and growing a return.

MF: And that's a very different profile from most of the managed funds that we see in the market.

GD: You find unit trusts trade at value of the underlying asset within the portfolio because they're open ended funds. An LIC, because it actually has a set amount of shares on issue, sometimes can trade at a premium, and sometimes can trade at a discount.

So managed funds are always priced at the value of the underlying portfolio, listed investment companies on the other hand, are impacted by the demand from buyers and sellers within a market.