When it comes to investing these days, the debate about how to invest normally centres on a discussion between actively investing in individual shares, or passively investing through exchange traded funds (ETFs).
Whilst both strategies are equally valid, I think that a certain class of share is being left on the sidelines – perhaps to the detriment of investors.
What are LICs?
Listed investment companies (or LICs for short) are not a new invention. In fact, the oldest LIC on the ASX – Whitefield Limited (ASX: WHF) – has been around since 1923, before even the Great Depression!
LICs work through a company structure – they’re essentially companies that invest in other companies for the benefit of their owners (shareholders). By holding their own shares, they can pass on profits, received dividends and franking credits straight through to their shareholders in a very efficient manner.
In this way, you can invest in one individual share but gain yourself exposure to the basket of companies that the LIC holds. So in that way, LICs are similar to ETFs. But unlike ETFs, LICs usually have management teams that select the shares on merit, rather than going off an indexed algorithmic formula.
In this way, many LICs concentrate on a specific investing goal. Some focus on international growth companies, while others concentrate purely on maximising dividend income for their shareholders.
Some ASX examples
A famous example of the latter is WAM Research Ltd (ASX: WAX). WAM Research is run by one of the LIC structure’s biggest proponents – Wilson Asset Management. This LIC focuses on finding undervalued ASX growth companies and selling them when their ‘true’ value is reached. It then pays out its profits as fully franked dividend income.
Over the past 10 years, WAM Research has returned an average of 16.5% per annum to its investors (before fees), which includes its whopping 6.5% fully franked dividend yield (on current prices).
Another top performer has been MFF Capital Investments Ltd (ASX: MFF). This LIC focuses more on top quality growth stocks from the US markets – currently holding companies like Visa, Mastercard, Coca-Cola and Alphabet. MFF has also returned an impressive 18.83% per annum over the last decade to its lucky shareholders (which I am fortunate enough to count myself among).
The best thing is I don’t have to worry about anything except buying more shares when a good opportunity arises. MFF’s management takes care of the hard things like choosing which companies to invest in or sell.
I think these 2 LICs demonstrate the benefits of this type of asset vehicle and why I think everyone should at least consider a good LIC as part of a well-balanced portfolio. They can be a nice alternative to managed funds and ETFs if those vehicles don’t appeal to your own strategies.
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Motley Fool contributor Sebastian Bowen owns shares of Magellan Flagship Fund Ltd. 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.