Help choosing a Listed Investment Company

[bond21]

First of all, do you think LIC's are a good investment if bought at a fair price?

Cadence look good - good performance, high dividend yield, trading at a fair value etc. However I've just discovered they charge a 20% annual performance fee whenever they beat the All Ords (which is pretty much every year). Others like Argo don't charge a performance fee at all.

I'm kind of new to LIC's but first of all where does this 20% charge come from? Is it just withheld from shareholders when it comes time to pay the dividend etc? Do they send a bill or what?

So basically if they didn't charge this 20% I'd go with them for sure, but does this 20% performance charge offset all their other good qualities? It seems excessive...I mean if their portfolio achieved a 10% annual return, they're charging a 20% performance fee?

Cadence Asset Management charges a management fee of 1.00% p.a. on the gross value of the portfolio, and is eligible to receive a performance fee of 20% per annum when fund performance is ABOVE the All Ordinaries Accumulation Index. When the fund peformance is negative but outperforms the All Ordinaries Accumulation Index, no performance fee is payable.

Anyway with all that said, what LIC's do you recommend, if any at all.

 

[TPI]

First of all, do you think LIC's are a good investment if bought at a fair price?

...

Anyway with all that said, what LIC's do you recommend, if any at all.

Ones with no performance fees, keeps it simple.

 

[coolcup]

Hi and welcome to ASF.

It is hard for us to recommend anything to you (or anyone on this forum) as we are not trained financial professionals and do not know or understand your personal circumstances. If you want a recommendation or advice, you need to see a financial adviser.

I can offer my personal views on the LICs and you can make of them what you will.

First, you have your large cap LICs like AFI, ARG and MLT who have been around for donkeys years, have large "blue chip" portfolios with all the brand names and aim to deliver a growing stream of franked dividends to their investor base. These are internally managed which means they have their own management teams and don't pay fees to external managers. As a result, their management costs are very low.

Second, you have a whole range of specialist LICs which are externally managed. These all have individual strategies and risk profiles and you should read exactly what they invest in before making a decision. The ASX website has a handy overview of each of the LICs if you browse a bit there. For example, some focus on small cap stocks, others use options and other derivatives trading strategies alongside a long term portfolio to boost income (at the expense of capital gain), others invest internationally. Their fee regimes also differ a lot.

On performance fees, as you have outlined above - these are usually charged if the LIC exceeds a certain hurdle. So in your example, if the fund returned 10% but the All Ords Accumulation returned 12%, no performance fee would be payable. If the fund returned 10% and the All Ords Accumulation returned 8% then 20% of the outperformance (2%) would be payable, ie a 0.4% additional fee. This would be paid by the LIC and the NTA would drop as a result.

Finally, when looking at LICs you should also bear in mind if any options are on issue. Each LIC will usually state its net tangible asset backing per share at the end of every month. This often excludes the effect of any options that are on issue should they be exercised. Take for example an LIC who has 100 shares with a stated NTA of $1.00 per share. It also has 100 options on issue with a strike price of $0.50. It is trading at $0.90. On the face of it, the share price looks cheap relative to the NTA. But if you buy today, the day after you buy all the option holders could choose to exercise their options leaving 200 shares on issue and an NTA of $0.75. So your 10% discount has suddenly turned into a premium.

So there is a lot to consider when framing your decision so I suggest you do a bit of reading and the ASX website is a good place to start.

All the best.

 

[Thraxier]

Hi,

Wise words have already been spoken that I couldn't agree more with.

First of all I personally think LICs are a fantastic long term investment. To me the term investment itself means long term anyway but many people these days seem to get that mixed up with trading and get rich quick schemes. The large cap LICs are very diversified and basically track the market itself by having large investments in the blue chips, not just some in one or two sectors. My tips would be to look for a long track record (in business for many years) and low management fees. At least 2 good LICs have already been mentioned. Don't over think it, just understand it and put money in that you don't need to touch for a decent while. Nice and simple, dividend reinvest, and let compound interest do what it does best over some years. Rest in knowing that if something is basically tracking the market and that were to completely fail, then you and everyone else invested or not invested have bigger things to worry about like the economy itself collapsing which would be worse than the GFC on steroids partying with hookers.

 

[So_Cynical]

First of all, do you think LIC's are a good investment if bought at a fair price?

Anyway with all that said, what LIC's do you recommend, if any at all.

Some useful info is available on the ASX site.

http://www.asx.com.au/products/managed-funds/market-update.htm

November LIC and fund report here.

http://www.asx.com.au/documents/products/ASX_Funds_Monthly_Update_-_November_14.pdf

 

[waimate01]

Best to go for one with Internal management, otherwise their goal is to transfer gains from them to you.

For example, if you look at the figures WAM quotes, their gains are quite remarkable. But these figures are before fees. If you look at the shareprice and dividends, the results are far more in line with the market. Where does the difference go? The fund manager.

The quoting of performance figures before fees is mischievous, in my opinion. It also has no relevance to you, only to them.

 

[bond21]

Thanks for the replies guys. Can anyone explain how the management fees and performance fees are paid?

 

[coolcup]

Thanks for the replies guys. Can anyone explain how the management fees and performance fees are paid?

As I stated previously:

This would be paid by the LIC and the NTA would drop as a result.