Listed investments: what’s out there

Listed investments are not a new development. As such, a whole industry has been established around them.

The products fall under the title of listed managed investments (LMI) and are similar to traditional managed funds.

However, they differ from managed funds in terms of structure and rather than being locked into a strict unit trust model, they can be structured as:

* a company, where investors are issued shares and dividends are generally fully franked;

* a trust, where investors own units. Distributions and franking credits are passed through to investors in the year they are received and based on the underlining assets;

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* a stapled security, where investors own two or more securities that trade in tandem, as if they are ‘stapled’ together.

The LMI category covers a wide range of products that are listed and described below.

Listed Property Trusts (LPT)

LPTs are the best known LMI due to the benefits of providing access to a portfolio of professionally managed real estate, as well as exposure to the value of the real estate the trust owns, and the regular rental income generated from the properties.

They use a closed-end trust structure that fixes the units on offer, which are traded on theAustralian Stock Exchange(ASX), with income and/or tax benefits from assets going to investors in the year they are earned.

Listed Investment Companies (LICs)

LICs are by far the oldest type of LMIs in the market. In these vehicles, investment companies and trusts invest in a portfolio on behalf of investors adopting different techniques and risk levels depending on each product. Like LPTs, they are closed end and are traded on the ASX.

LICs usually cover four areas: Australian equities, international equities, private equity, and specialist investments such as wineries, technology and resources.

They offer tax advantages to individual investors, with the net income of the LIC taxed at 30 per cent, which is then passed on with a franking credit to investors.

Exchange Traded Funds (ETFs)

ETFs exploded onto the investment scene in the US during the height of the bear market, but have yet to gain a firm foothold in Australia. They currently hold assets of more than $300 billion in over 200 products listed on the North American, European and Asian markets.

ETFs are basically a portfolio of securities that are traded in the same way as shares, and investors can be sure they will buy and sell at the value of the underlying portfolio’s net assets. Price parity is maintained between the traded unit price and the net asset value of the units, ensuring the value of the units will closely track the performance of the fund. This is due to the open-ended nature of the funds.

ETFs are usually one of the following: classical — based on and aim to match the performance of an indice; hybrid — based on an index or actively managed by a fund manager selecting securities.

Pooled Development Funds (PDFs)

PDFs are basically venture capital vehicles designed to encourage investment in small to medium-sized Australian companies. Given the speculative nature of these investments, the market price of a PDF can be volatile over the short-term.

PDFs are governed by criteria including: the investment must be in Australian companies; PDFs must purchase at least 10 per cent of a company’s shares; investee companies must be smaller than $50 million in assets; and PDFs cannot invest in retail or real estate businesses.

PDFs have been granted tax concessions from the Federal Government such as a tax rate of 15 per cent from investments in small enterprises, and 25 per cent in unregulated investments like cash.

Infrastructure Funds

Infrastructure Funds allow investors to own assets such as airports and toll roads, and funds listed in Australia represent more than $6 billion in assets. They are similar in principle to LPTs but invest in assets used by companies and the public instead of properties.

Like LPTs, the distributions from infrastructure funds tend to be tax advantaged, and asset values are generally stable over the short-term, while offering strong long-term growth potential.