How To Get The World’s Best Investors To Manage Part Of Your Investment Portfolio Without You Having To Lift A Finger Through LICs.

Let’s face it, not all of us have the same knowledge and experience in the share market as Warren Buffett. Many have tried to outperform the market for over 100 years, most of which have failed miserably.

There’s a famous saying, “If you can’t beat ‘em, join ‘em”. This can also apply to the unpredictable and (let’s face it) ruthless world of investing, where the stock market can eat you up and spit you out at any point if you aren’t careful. Wall Street has taken the life savings of many people who believed they could become the next Warren Buffett overnight and don’t ever forget it.

While investing in a broad and diversified index fund or ETF is a great idea for most if not all investors, the returns of your portfolio could get an even greater boost in both the short and long term if you leave a portion of your portfolio in the hands of the experts through LICs.

Before the rise of exchange traded funds (where you can invest in a fund operated either actively or passively), it was quite complicated for everyday investors to find a trustworthy fund manager, but now we have the ability to find and invest in funds that are operated by Listed Investment Companies (LIC’s) that are listed on the stock exchange. All you need is a brokerage account to get started.

What Is A Listed Investment Company (LIC)? 

A listed investment company is an organisation that invests in assets to generate returns for both shareholders and for the company itself. They can have multiple investment portfolios (that are packaged into funds) as well as shares of the company itself that are all listed on the Australian Stock Exchange (ASX).

The performance of both their share prices and dividend distributions is then based primarily on the performance of the companies that the LIC invests in and factors such as the market’s confidence in the investment company itself.

These investment funds that are created and managed by the listed investment companies are called actively managed ETFs. This is because unlike a passive index-based ETF such as ASX:VAS that tracks the ASX 300 index via a computer, these active ETFs have an actual management team behind them that manually buy and sell companies. The portfolio managers choose these company’s because they believe they will outperform the rest of the market over the short, medium, and/or long term (depending on their strategy).

There are many LICs operating within Australia, each with its own professional investment team. And each one has their own views on the stock market, and goals and objectives. Getting the greatest investors and minds in the world to invest for you sounds great, but there is a catch.

What’s The Catch With LICs? 

If you employ a robot or a computer to produce products in a factory, your production costs are cheaper because you aren’t paying anybody (sorry robots). Same goes with investing. Since index tracking ETFs have computers that buy and sell stocks that join or fall out of the index, the operating costs are low. This usually means that the management fee for these ETFs is also low.

For example, the annual management fee for one of the most popular Australian index ETFs, VAS, is only 0.10%. That means that if the market value for your holdings in VAS is $1,000, the fund manager, Vanguard, will deduct a $1 fee. This is because 0.10% of $1,000 is $1. Because LIC’s have actual people who are professional investors managing their investments, the management fees are higher. They need to get their salary from somewhere. 

Management fees for both listed and unlisted actively managed funds can range from 0.50% up to 2%, even 3%. So if the market value of your holdings in an active fund is $1,000, and your management fee is 3%, they will deduct a $30 fee. This still might not sound too bad, but think of this way. If you’re in your 50’s or 60’s and you have $1,000,000 in this fund, your fee for that year will be $30,000! That’s a new car or 30,000 frozen cokes!

Why Would You Invest In LICs With Fees That High?

By now, you’re probably asking “Why would I even consider an actively managed fund or ETF with fees like that?”. That’s certainly a valid question. The answer comes down to whether or not if the fund is consistently (or mostly) beating the average market returns even after deducting your fee. Only at that point, it could still be a good idea to invest a portion of your portfolio with them. 

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For example, let’s compare VAS with a management fee of 0.10%, and a hypothetical listed investment company that has a management fee of 1.5%.

Let’s say Felipe has $1,000 invested in VAS, and Paul has $1,000 invested in the hypothetical LIC. This is where we need to compare the returns/performance of each fund combined with their management fee.

If VAS tracking the ASX 300 returned 10% for the year, this will bring the value of Felipe’s investment to $1,100, minus a 0.10% fee of $1.10, leaving him with $1,098.90.

If the professional investors behind Paul’s listed investment company achieved a return of 15%, which means they’ve beaten the market by 5%, Paul’s $1,000 would be $1,150 by the end of the year. After you deduct the 1.5% fee, which is $17.25 Paul is left with $1,132.75 at the end of the year. So essentially Paul is left with $33.85 more than Felipe, despite his management fee being 15x more expensive.

While this may have reignited some of your interest for LIC’s, let’s remember that this is purely hypothetical. Many fund managers actually fail to ‘beat the market’ over the long term. So we’ve given arguments both for and against investing in actively managed funds, what’s our final verdict? 

Why Would You Invest In An Active Fund With Fees That High?

By now, you’re probably asking “Why would I even consider an actively managed fund or ETF with fees like that?”. That’s a valid question, however if they are consistently (or mostly) beating the average market returns even after deducting your fee, then it could still be a good idea to invest a portion of your portfolio with them. 

For example, let’s compare VAS with a management fee of 0.10%, and a hypothetical listed investment company that has a management fee of 1.5%.

Let’s say John has $1,000 invested in VAS, and Paul has $1,000 invested in the hypothetical LIC. This is where we need to compare the returns/performance of each fund combined with their management fee. If the entire Australian stock market returned 10% for the year, this will bring the value of John’s investment to $1,100, minus a 0.10% fee of $1.10, leaving him with $1,098.90. If the professional investors behind Paul’s listed investment company achieved a return of 15%, which means they’ve beaten the market by 5%, Paul’s $1,000 would be $1,150 by the end of the year. After you deduct the 1.5% fee which is $17.25, Paul is left with $1,132.75 at the end of the year. So essentially Paul is left with $33.85 more than John, despite his management fee being 15x more expensive.

While this may have reignited some of your interest for LIC’s, let’s remember that this is purely hypothetical. In reality, many fund managers fail to ‘beat the market’ over the long term. There is however another essential thing to consider when investing in a LIC, and this gives you a unique opportunity to buy shares of the worlds biggest companies at a massive discount of up to 25% or more!

Difference Between The Net Asset Value Of A LIC’s Fund And Its Share Price

Listed Investment Companies (LICs) are closed-ended by nature. This means that there is only a finite amount of shares available for purchase on the stock exchange to buy. On the contrary, index-based ETFs such as VAS are open-ended, meaning that the fund (in this case Vanguard) can and do make more shares available when demand increases.

This fact that LICs are closed ended means that the underlying value of the LIC’s assets and the share price of the LIC itself can be quite different, and this presents an opportunity to investors at the right time. 

The Net Asset Value (NAV) of a LIC fund’s portfolio is the market value of all of the holdings within the fund. However, in some instances you’re not buying the fund at their net asset value, you’re buying the fund at the LIC’s share price.

Let’s say that the LIC holds 100% of their portfolio in Apple and the market value of their holdings is $100. That means the Net Asset Value (NAV) of their portfolio is $100. Let’s also say that the LIC has 5 shares on offer. With 5 shares and a NAV of $100, you’d assume share price will always then be around $20, however other factors come into this such as how much confidence investors have in the LIC in both their short and long term performance. This means that if the NAV is $20 (per share), sometimes the share price of the LIC can drop to $15, meaning you will get a 25% discount to NAV!

What Are The Main Factors To Consider When Choosing A LIC To Invest In? 

Here’s a breakdown of the main things to consider when choosing a LIC to invest in? 

  • What is their management fee? 
  • What is their investment philosophy and objective, and do they align with yours? 
  • Are the investment and management team experienced and have a good track record?
  • Are they trading at a discount to NAV? 
  • What industries and countries is the LIC’s fund exposed to? 

What Are Some Popular LICs In Australia?


To get you started, here are some popular LICs within Australia: 

  • AFIC (This is the biggest LIC in Australia at the moment)
  • L1 Long Short Fund (For full disclosure, a member of the Money Pal team has a position in this fund)
  • Magellan (For full disclosure, a member of the Money Pal team has a position in a Magellan fund)
  • Argo Investments Ltd
  • Milton Corporation Ltd

So we’ve given arguments both for and against investing in actively managed funds, what’s our final verdict? 

Final Thoughts On LICs

Like all other areas of investing, it’s important to diversify, do your research to minimise your risk. In this case, investing in a LIC can be a good idea if you consider the above factors we’ve listed, and they tick all the boxes then investing a portion of your portfolio in the LICs fund can give that extra boost to both your short and long term returns. 

But with that said, it’s not prudent to put all of your eggs in one basket. l personally invest the majority of my portfolios in broad, low cost index funds, and a smaller portion in active funds operated by LIC’s.

As always, you should do your research and take the time to know and understand the LIC you want to invest in before pulling the trigger. 

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Disclaimer: This website (the “The Money Pal”) is published and provided for informational and entertainment purposes only.  The information in this Blog is general in nature constitutes the Content Creator’s own opinions. The information in this blog should not be regarded as financial advice. 

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About The Author – Christian

Christian is a passionate and devoted financial writer. His love for finance originated during his time at University where he studied business, economics, and finance extensively. Christian is keen on consistently improving his knowledge on investing and personal finance, whilst also making the topic more of a prominent talking point amongst Millenials. Christian finds his happy place having a yarn about all things finance, current affairs, and his beloved Collingwood FC over a few independently owned craft beers.

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