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Hi b4bmm At it's... 17/02/2017, 22687793

  1. Occam Logic

    1,008 Posts.
    Hi b4bmm
    At it's simplest these are the main differences between LICs and Funds:

    - Are somewhat easier to use from an administrative perspective given they are listed and traded like shares.
    - Use a company structure, so tend to deliver a greater amount of franking because the LIC pays company tax and may also receive franking credits from the underlying portfolio.
    - Are closed ended in that they work with a fixed pool of capital. Accordingly they don't have to buy and sell investments all the time in response to people moving in and out of the vehicle or buy when the market is hot/sell when the market is crashing. Therefore, from a purely investment portfolio standpoint they should be more efficient than funds all things being equal.
    - As a company, they can hold profit reserves which can allow dividend smoothing.
    - Being listed, they can trade away from their Net Tangible Asset value, often substantially. Accordingly, returns transmission between the investment portfolio and shareholder returns can be rather inefficient.

    - Can involve a lot of paperwork, although the recent implementation of the ASX mFund platform has made this a bit easier for some funds. They also have fixed minimum investment sizes which can make things a bit tricky if you don't want to commit minimum sums like $20k - $50k for each fund. Some however have smaller minimums, case by case.
    - Use a trust structure which means that all income had to be paid out, you cannot retain profits in a trust. This makes the distributions a bit more erratic even though total return may be the same.
    - Trust structure does not pay tax, so does not naturally generate as much franking, just that which flows through from the underlying investments.
    - Are open ended which means that performance can be impacted by investor capital flowing in and out of the fund, particularly if it is in large chunks.

    A useful site which supplies a range of quick indicators on LICs (and ETFs) is www.etfwatch.com.au. You can also get a fair bit on funds from sites like www.morningstar.com.au and www.investsmart.com.au. There is also a handy guide here which lays out the differences between LICs, ETFs and Funds https://affluencefunds.com.au/wp-content/uploads/2016/03/201602-AFM-Guide-To-LICs_Download.pdf

    Personally, I believe that LICs are a better choice to use opportunistically based on their trading around NTA as well as the investment theme and manager skill obviously. I don't believe there is much point paying a 20% premium for a LIC, no matter how good the manager is. With Funds, what you see is what you get. I do use both, but I use funds more frequently.

    Hope this helps!

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