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Top investor reveals 4 things to look for when buying LICs

Wilson Asset Management (WAM) founder Geoff Wilson has revealed four key things to look for when buying listed investment companies (LICs).

WAM operates a variety of LICs including WAM Capital Limited (ASX: WAM), WAM Research Limited (ASX: WAX) and WAM Leaders Ltd (ASX: WLE).

In an article published on Livewire, Mr Wilson said that the fact LICs can trade at premiums and discounts is attractive because it allows you to buy a dollar of assets for eighty cents, which is a “great positive”.

However, a discount alone is not enough to justify a purchase, as the LIC could produce poor returns that underperform the market. Sometimes discounts occur because the fund manager “doesn’t create value”.

WAM Global Limited (ASX: WGB) and WAM Leaders Ltd (ASX: WLE) are two of the newest WAM LICs, but they are the ones in the WAM stable trading at a discount.

According to Mr Wilson, four of the things to look for when a LIC is trading at a discount:

The underlying fund manager must perform

When you’re investing in an LIC you are choosing it because you expect the manager to perform well.

The company should deliver a consistent growing stream of fully franked dividends

The LIC structure allows fund managers to smooth out the growth of income to investors. This is particularly attractive for investors who rely on income.

The company should have a shareholder engagement and communication & marketing strategy

Talking with your shareholders is important. If you don’t explain your investment process and what you’re doing, short-term negative market movements could cause some people to sell (quickly).

The company must treat shareholders with respect

Respecting shareholders is important, the fund manager must realise that it’s the shareholders that own the company and they are only there as the manager because the shareholders allow them to be there.

Foolish takeaway

WAM is certainly one of the most well-respected LIC managers on the ASX, it certainly ticks all of the self-made boxes by Mr Wilson.

At the current share prices I’d be happy to buy more WAM Global and WAM Microcap shares for my portfolio.

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Motley Fool contributor Tristan Harrison owns shares of WAM MICRO FPO and WAMGLOBAL FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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