Investors warned to do their homework on LICs

By Craig Phillips

INVESTORS should take the time to fully research and understand any listed investment company (LIC) before joining the throngs swept up in the industry’s new-found love for these investment vehicles, according to global investment services firm, Russell Investment Group.

Russell Investment Group Australasian managing director Alan Schoenheimer believes investors can avoid common pitfalls by taking into account a number of issues often related to LICs.

Schoenheimer urges investors to read the prospectus, understand the performance fee structure and how this aligns the manager’s interest with their own, understand the impact of options on the fair price for the LIC’s shares, and look for LICs with independent boards.

He recommends investors never pay more than the net tangible asset (NTA) value. He also says they should try to buy at a discount to the NTA and be prepared to ride out periods where an LIC will trade at a discount to its asset backing.

“Judging actual performance of underlying investments is difficult for retail investors as the LIC’s share price performance is a combination of investment performance and market premium/discount.

“There’s no question that LICs have recently had a period of strong share price performance, but this has not always been the case historically,” Schoenheimer says.

He points out that LICs often trade away from fair value or NTA, and that has either been below or above this value and therefore urges investors not to just assume it will trade at a premium.

The group’s research also reveals price volatility for LICs is often higher than for managed funds, with a typical LIC tracking error in the region of 12 to 20 per cent against theS&P/ASX300 Accumulation Index, compared to 3 to 5 per cent for managed funds.