When I look back at my investing mistakes, one common theme is rushing into a new purchase. I find I have usually done better when a number of months pass until I begin accumulating a position in a new idea.

When investing in Listed Investment Companies (LIC) [Ed. note: an Australian investment vehicle similar to a closed-end fund] I try to make sure I have considered numerous factors first. That helps me avoid getting itchy fingers and hitting the buy button quickly.

I’ve seen some similar lists around but I thought others may find it useful to share my perspective. Hopefully, I have introduced some different thinking to the topic.

I have less experience investing in closed-end funds on the New York and London exchanges. From my observations though this list also looks relevant to CEFs in general.

If you have suffered from decision regret after rushing in to buy a LIC before (I know I have!), perhaps you can bookmark this page. Keep the list handy to check before hitting the buy button. Please share your comments as I am sure other perspectives can also help and improve the list.

As we are a few years past a flurry of LIC issuance I also observe someones with some pretty ordinary early performance. Hindsight is wonderful of course, but with LICs such as HML, MA1, FPC, 8EC, LSF, BAF, CIE etc., perhaps a checklist like this would have given some food for thought. How many red flags could we have perhaps spotted from a basic checklist?

1) Discount / Premium to NTA.

• All things being equal a discount preferred, but either may be warranted depending on factors coming up in the next points. Take account of the pre and post-tax measures.
• Apply extra caution if buying at a premium. I very rarely do so. Don’t buy at IPO is another good rule of thumb.

2) Management Expenses and ALL other costs.

• Base fee but ALSO performance fees. Is the performance fee based off a fair benchmark?
• Have you considered other costs such as administration fees, director’s fees, accounting fees etc that could potentially more than double your overall fees?

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?

9) Future Dividend Capacity

• Don’t get overly fixated on historic yields, if dividends are cut this could see an adverse share price reaction.
• Examine profit reserves, available franking credits, & current/future potential investment performance. An improving dividend picture in the future can sometimes cause a large positive share price reaction. Look forward more than you look back in the rear vision mirror.

10) Marketing / Reporting of the LIC.

• LICs that make a minimal effort with the information they give out in monthly NTA releases can trade cheaper as a result.
• Also if there is no effort to occasionally engage with the financial media then it may be more likely to trade at a discount to NTA in the future.

Hope this helps!

11) Does the LIC have a pirate-themed name?