The Experts

Adam Lund
+ About Adam Lund

Analyst / Trader

Adam is one of the founding members of the Manager at Spheria and is responsible for the trading of all of the Manager’s investment strategies. Adam also has research and portfolio construction responsibilities.

Adam’s career began in 2005 at Thomas Hopper & Partners Chartered Accountants where he worked across the taxation, audit and company account divisions.

Prior to Spheria, Adam spent 5 years as an equities and derivatives trader at Schroders Investment Management Australia. Adam worked closely with Matthew Booker and Marcus Burns trading for the small and micro cap funds.

What are the benefits of the listed investment company (LIC) structure

Wednesday, November 22, 2017

By Adam Lund
What is it about the LIC structure that is proving so appealing, compared to a managed fund? The short answer is that the structure offers significant advantages. 
For example, in some of the recent LIC listings, managers have absorbed listing costs, which end investors have favoured. Furthermore, the number and scale of offerings has meant a significant improvement in the secondary market liquidity.
The LIC structure has many benefits… and some risks
Some of the advantages that the LIC structure, often seen as the listed alternative to a managed fund, offers include:

  • LICs are closed-ended.  This means that once listed, the LIC does not have the cash flow pressures of a managed fund, which must keep cash on hand to manage applications and redemptions. As a result, the frictional cost (direct and indirect costs associated with executing transactions) is typically lower.
  • LICs may be fully invested. The LIC structure may not require that cash be kept on hand, therefore, the manager can focus on investment fundamentals without worrying about cash flow.
  • Fully franked dividends may be payable – generally presenting a tax benefit for investors, particularly for superannuants. It may also retain earnings, whereas unit trusts are required to pay income distributions as they are due.
  • LICs have an efficiency advantage. Accessing a quality investment manager via a listed vehicle is efficient because exposure can be bought and sold on an exchange.              

On the other hand, here are some of the risks and potential drawbacks, which also need to be managed:

  • Market timing is very important for an LIC, because once listed, it cannot raise new funds without going back to the market. This means that if all the proceeds of the initial public offering (IPO) are invested on listing, and the market falls soon afterwards, it can be difficult to re-balance the portfolio without raising new funds.

    The best way to mitigate the risk of this happening is to choose an experienced manager with a track record of managing market-timing. For example, this could mean extending the trade horizon to deploy capital after listing, rather than investing fully in the short term. In our view, six months is an appropriate time to take to invest capital in order to offset market-timing risk.
  • Dividends can only be paid out of retained profits. It takes time to generate profits to pay out dividends. In some cases, investing in an unlisted trust could see earlier distributions to investors. 

This is a sponsored article from Spheria Asset Management Pty Limited (Spheria).

Spheria Emerging Companies Limited (the Company, ASX:SEC) IPO is a very limited opportunity to invest in an actively managed, Australian and New Zealand small companies portfolio, designed for investors seeking capital growth and portfolio diversification. The Company aims to maximise total Shareholder return via a combination of capital growth and income, with the aim of regularly paying fully franked dividends to Shareholders.  The investment portfolio is managed by Spheria Asset Management Pty Limited (Spheria), a specialist team with a track record of navigating the higher risk opportunities at the small end of the market. Find out more here.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.