Experiencing a peak in interest a few years ago due to a certain book written by a particular shoeless man, LICs have fallen out of favour recently. ETFs have clearly overtaken listed investment companies (LICs) as the savvy investors preferred choice of vehicle.
This article will review the investment structure, the most popular LICs on the market and suggest situations where they may still be relevant for some investors.
What is a Listed Investment Company
A Listed Investment Company (LIC) is a publicly listed company that invests in a diversified portfolio of assets, typically Australian shares, and is traded on the ASX like any ordinary stock. When you invest in an LIC, you’re buying shares in the company itself, which in turn owns a portfolio of investments. The LIC structure is closed-ended, meaning it raises a fixed amount of capital when it lists and does not issue or redeem shares in response to investor demand. This stability allows portfolio managers to take a long-term approach without worrying about daily inflows or redemptions from investors.
Unlike managed funds or ETFs, which are trusts that must distribute income, LICs pay dividends from after-tax profits. This allows them to retain earnings and use profit reserves to smooth dividends over time, a feature that appeals to income-focused investors. However, since shares in an LIC are bought and sold on the market, the share price may trade at a premium or a discount to the underlying value of its investments (known as net tangible assets, or NTA), depending on sentiment and market conditions. More on that later.
Compared to ETFs
While LICs and ETFs can hold similar underlying investments, such as ASX-listed shares, their structure and behaviour are quite different. ETFs are open-ended unit trusts that automatically issue or redeem units in response to investor demand. This mechanism ensures that an ETF’s market price very closely tracks the value of its underlying assets. In contrast, an LIC’s price is set purely by the market and can stray significantly from its NTA depending on underlying sentiment.
ETFs tend to be low-cost and transparent, tracking broad market indexes with minimal intervention. LICs often employ active management and carry higher fees. As mentioned before, ETFs pass income and incurred capital gains directly to investors, while LICs pay franked dividends from company profits. This gives LICs more flexibility in managing income payments, but also adds complexity and can make comparisons difficult.
Popular Options
The two largest and most enduring LICs in Australia are AFIC (Australian Foundation Investment Company) and Argo Investments, with over $9 billion and $6 billion in assets under management respectively. Both focus on long-term investment in large-cap Australian equities and appeal to conservative, income-seeking investors due to their stable dividends, low fees, and long-standing performance histories. AFIC in particular has existed for almost 100 years, almost 50 years longer than the first index fund, and nearly 70 years older than the first ETF. They are essentially the closest product to an index fund if index funds didn’t exist.
On the other end of the spectrum are LICs like WAM Capital & Regal, which take a much more active and opportunistic approach. These LICs aim to outperform the market through high-conviction stock picking and short-term trading strategies. This naturally comes with much higher management fees often well over 1% annually. This is in addition to performance fees. Performance fees are typically based on portfolio performance, not share price, which means managers may earn fees even if shareholders don’t experience equivalent returns due to movements in the LIC’s market premium or discount.
Overpaying and Underpaying
LICs are simply just companies listed on the ASX, this means their share prices are driven by supply and demand, not just the value of their underlying assets. This means LICs can trade at a price that is either above (premium) or below (discount) their Net Tangible Assets (NTA).
Unlike ETFs, where the structure keeps the market price in line with the underlying value, LICs can deviate, sometimes significantly, from their NTA. This creates an added perceived layer of risk (and perceived opportunity), particularly for investors who aren’t paying attention to what they’re actually buying. You’re not just investing in a portfolio, you’re buying a slice of a company that holds that portfolio, and the price you pay may not reflect its real-world value.
Buying at a Discount
When an LIC trades at a discount, it means you’re paying less than the value of the underlying assets. For example, if an LIC has an NTA of $1.00 per share but is trading at $0.90, you’re effectively getting 10 cents’ worth of assets for free – on paper, at least. This can tempt some investors into thinking they’re getting a discount in the typical sense of the word.
AFIC is a good real-world example. In early 2024, AFIC’s share price traded at a discount of around 6% to its pre-tax NTA. For a long-standing, conservatively managed LIC, this seems like a no brainer to invest. However, discounts don’t always correct quickly (or ever) and often reflect very real pessimism about the manager or the underlying portfolio. Essentially, the market is suggesting that the portfolio manager is adding negative value compared to owning the same investments directly or via another structure.
Buying at a Premium
Buying an LIC at a premium means paying more than the underlying portfolio is worth. This can happen when a manager has had a recent spell of outperformance – or simply benefits from good marketing. Investors may be willing to pay extra for perceived skill or reliability of income distribution.
However, paying above NTA introduces additional downside risk: even if the portfolio performs, a narrowing of the premium can result in a capital loss. It also creates the previously mentioned phenomenon where some LIC managers can earn performance fees even when the return experienced by investors doesn’t meet the usual hurdle.
AFIC has traded at a premium in the past, most notably during 2021 and parts of 2022, when low interest rates and the hunt for yield pushed its share price up to 10-15% above NTA. For investors who bought in during that time, even solid portfolio performance wasn’t enough to prevent losses once the premium normalised and eventually flipped to a discount. It’s a reminder of the behavioural element at play with LICs: investors can overpay in search of perceived safety, even when the underlying assets don’t justify the mark-up.
Downsides Compared to ETFs
Whilst LICs continue to have their loyal supporters, there are several structural disadvantages that have seen many investors gravitate toward ETFs in recent years. The largest reason is price transparency. ETFs are designed to trade in line with the value of their underlying assets, thanks to a mechanism known as arbitrage. If the ETF price drifts from its Net Asset Value (NAV), institutional traders step in and buy or sell units until the gap closes. This means that, unlike LICs, ETFs don’t usually trade at a sustained premium or discount. What you see is more or less what you get.
LICs, on the other hand, rely on market sentiment to set their share price. As a result, investors can find themselves buying into a portfolio at a premium or selling out at a discount, as previously discussed.
ETFs also tend to be more tax-efficient, particularly for investors who value capital gains deferral. Because ETFs are structured as trusts, they pass through income and realised gains to investors. LICs, being companies, retain some control over when they realise capital gains and how much income is distributed. While this allows for smoother, more predictable dividends, it can lead to embedded gains sitting on the books potentially creating tax consequences down the track when assets are eventually sold.
Another key distinction is cost. LICs often carry higher fees, especially for those with large active management teams. Some LICs charge performance fees on top of already high base fees. By contrast, ETFs, especially those that track indexes, are generally low-cost and transparent.
Finally, ETFs offer better diversification and accessibility. A single ETF can give exposure to thousands of companies across global markets, with daily liquidity and tight spreads. LICs, being individual vehicles with narrower portfolios and fixed capital, don’t offer quite the same flexibility or breadth.
Benefits Compared to ETFs
Despite falling out of favour compared to ETFs, LICs retain a few key advantages that make them worth considering in certain circumstances, particularly for income-focused investors or those managing tax-sensitive structures.
A feature of LICs is their ability to smooth income. Unlike ETFs, which are required to pass through all income as it’s received, LICs can retain profits and manage dividend payments over time. This means dividends tend to be more stable year to year, even if the underlying portfolio has volatile returns. This makes them attractive to retirees, despite income yield not being a great measure of portfolio performance.
Franking credits are also typically more consistent with LICs. Because they control how and when income is distributed, LICs can manage franking balances and maintain a steady level of fully franked dividends. ETFs, in contrast, distribute franking credits as they’re received, which means the level of franking can vary significantly depending on the ETF’s income composition and the timing of distributions.
Some LICs, including AFIC and ARGO, offer a Dividend Substitution Share Plan (DSSP). Under a DSSP, investors can choose to forgo a cash dividend in exchange for receiving additional shares, without triggering immediate tax consequences. This is especially valuable for high-income earners or minor trust accounts, who would otherwise face punitive child tax rates on passive income. Because DSSP shares are not considered income in the year received, they can be an effective strategy for compounding within family trusts without incurring excessive tax on behalf of children.
Finally, LICs operate with a fixed pool of capital, unlike ETFs which expand and contract with investor flows. This can give LIC managers a more stable platform to invest with a long-term view, without the need to constantly rebalance or sell assets to meet redemptions. While this won’t matter to every investor, some see it as a structural advantage that allows for less volatile management dynamics.
Conclusion
Whilst ETFs have rightly become the default choice for many investors due to their low costs, price transparency and tax efficiency, LICs still hold niche appeal. Their ability to smooth income, manage franking credits, and offer options like the DSSP make them particularly useful for income-focused investors and those with punitive tax rates (like children).
However, the risk of buying at a premium, higher management costs, and the potential disconnect from underlying asset value mean that investors need to be more selective and better informed when choosing LICs. For those willing to navigate these nuances, LICs might still be relevant in some particular situations.
