Listed Investment Company (LIC) Defined
Listed investment companies (LICS) are companies not trusts and this affect how your investment is taxed. LICS pool investors funds and buy a basket of investments in keeping with their investment strategy. The first LIC in Australia was listed over eighty years ago. Most LICs, as companies, distribute income as fully franked dividends on which 30 percent (company) tax is already paid. For example if the investor’s marginal rate of tax is also exactly 30 percent, or lower, no further tax is payable on this income.
Listed investment companies (LICS) are not technically index funds, they are actively managed and their management fees are not that low (in the range of 0.18% to >1% – refer to List of ASX Listed Companies), however since some of the listed investment companies in Australia offer similar diversified exposure to an index fund they have been included (the table below was sourced from the Sydney Morning Herald and is current as at October 2012)
The typical LIC strategy involves an actively managed selection of investments called the underlying portfolio. The underlying portfolio value less any LIC liabilites equals the net asset value (NAV).The NAV or net asset backing of each share is usually more than the market price of each price (but not always). The market price is determined by market demand and supply, not the fund’s net asset value, although the two are obviously related.
Most LICS pay half yearly and/or yearly dividends and the amount is related to both the dividends received by the fund and the performance of the underlying investments or NAV the fund.
Although the number of shares of an LIC remain constant, occasionally additional shares may be created through a share issue as part of a secondary offer, a rights offer or the issuance of shares for dividend reinvestment.