LIC Investing In Australia – 10 Factors To Check Before Buying

3) Performance Track Record.

  • Is it based off the long term, including through a bear market?
  • Is it recorded correctly? Some LICs can be “creative” and make calculations before various fees and impact of dilutive share raisings.

4) Investment Style.

  • For example, are they running a deep value strategy that has failed to keep pace during the current era? Are they picking small-cap stocks in an environment that has lagged large-cap indices? The current style in vogue may make the manager look worse than they are over shorter time frames. Conversely, it may flatter certain fund managers. Try to maintain a long term focus.
  • Make sure the asset class and style fits in with your current portfolio.

5) Alignment of management’s interest with shareholders.

  • Do they have a history of raising shares on issue? Does this occur to boost management’s AUM revenue whilst diluting NTA value for shareholders?
  • Are there any options outstanding on the LIC that could dilute the NTA in the future?

6) Ownership Structure

  • Related to the management alignment issue, do management own a large blocking stake, e.g. up to 20% of the shares?
  • Does this make them happy to see shareholder returns high? Or is this used to keep management AUM revenue high, which could come at the expense of shareholder returns?

7) Investment Management Agreement (IMA).

  • Some can leave you “trapped” in the LIC for a decade and have expensive break fees.
  • On the other hand, if there are no barriers here, buying at a large discount to NTA could see one benefit from a decision to wind up the company. 

8) Size of the LIC.

  • LICs well under the $100 million mark may suffer from fixed costs being high as a percentage of the business. Liquidity of the shares may be low.
  • However, LICs managing billions may be inflexible. Are the trading LICs too large to move in and out of stocks? Do the investing LICs retain old large stock positions to avoid paying tax, leaving them in poor performing mature businesses?
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