Here at Eureka Report we take a hard line on lazy fund managers: Listed investment companies (LICs), on the other hand, have got away very lightly. Those big names - Argo, AFIC, Choiselu, Milton - we've doffed our hats to their eminence and sterling track records.
But today we blow the lid on LICs. Following a series of requests from subscribers who wanted to see LICs examined independently, our exclusive Eureka Report survey will prompt all investors to see LICs in a new light. Yes, they do well, but they don't do as well as the market. In fact on average LICs do not match the market; worse still, the bigger the LIC the worse it gets. What is a listed investment company?
Let's start with the basics. LICs are companies, listed on the Australian Stock Exchange, carrying on the business of managing an investment portfolio. Investing in a LIC means that you become part-owner of the underlying investment portfolio, and the investment manager's skill. Among the biggest and best-known LICs are the JB Were-linked Australian Foundation Investments, Rob Patterson's Argo Investments, and Choiseul and Milton, two LICs associated with veteran investment manager Robert Millner.
Being able to become a part-owner of an investment portfolio by purchasing just one listed investment means LICs are a great source of "instant diversification".
LICs can represent some of the cheapest managed investments available. For example Argo, a long-established listed investment company that manages an Australian share portfolio, has a management fee of 0.15% of the companies portfolio. This is less than a tenth of the average retail managed fund fee of just over 1.8%!
Understanding the net tangible assets of an LIC is important to understanding how LICs work. The net tangible assets of an LIC are the value of the investment portfolio on a per share basis. For example, Argo investments, a large listed investment company reported its net tangible assets (the value of the underlying investment portfolio) as being $8.07 per share at the end of August 2007. Translated, this means that investors buying Argo shares - trading at about $8.02 - were buying an investment portfolio with a value of $8.07 per share. Why might we expect LICs to outperform managed funds?
My expectations prior to putting together the results for this study were that listed investment companies (LICs) should outperform the large retail managed funds we looked at in our recent managed fund survey
. I think that a lot of educated investors also see LICs as more sophisticated investments that are likely to outperform the large managed funds. I would offer three reasons for this perceived sophistication and expected outperformance: