Listed investment companies are suitable for conservative investors seeking higher yield with greater diversification and active funds management that aims to do better than the broad market.
The oft-maligned sector is attracting more interest as regulatory changes make it easier for LICs to pay dividends. The largest LICs, such as Australian Foundation Investment Company and Argo Investment, yield more than 5 per cent fully franked and have a good record of increasing dividends.
Their yield compares well with yield ETFs, but the big difference is LICs offer active management that could return more than an index – although larger ones are typically long-term, buy-and-hold investors.
ETF issuers are often keen to promote the underperformance of many active managers relative to the index against which their performance is gauged, after fees. But that underplays the benefits of a good manager that can minimise losses and maintain yield during market downturns.
Another LIC attraction is the ability to buy at a discount to pre-tax net tangible assets.
The other attraction is the close-ended structure of LICs, meaning their managers do not have to worry about fund inflows and outflows that can force buying or selling decisions at the wrong time.
This is a problem that sometimes blights open-ended managed funds in periods of heavy redemptions.