LIC vs Index

Hi All,

Reading a number of threads on here, there seems to be many fans of holding LIC's as well as Index funds. Being that I hold mainly managed funds and am now looking at shifting more towards index funds I thought I would look at LIC's for comparison especially some of the ones regularly mentioned on this forum. After a quick comparison it doesn't look like many have outperformed the index in the last few years. Even looking back 10 years, at best some are fairly even with the index.
So the questions is why the love for LIC's and not just stick with the index funds? I notice the dividends from the LIC's looks to be more stable but is it not overall performance that is more important?
I was wondering whether LIC's would work better for me than the managed funds I hold, but it looks like neither can beat the index they are up against.
Interested to hear the opinions of those who hold LIC's.

Cheers

 

Did @Snowball put you up to this to save him having to research his next blog entry. He’s sending cheque’s out everywhere by the look of it.

 

Indexing is much simplier. The main benefit of LICs is their ability to trade at less than their underlying assets and to a much lesser extent dividend smoothing, able to participate in Buybacks. And given some of the risks at present the discount some buyers might demand could be greater than usual. That certainly applies to me.

Even as a fan of LICs, nowadays the ones of interest to me generally need to be attractively priced to choose them over an index ETF.

In fact I’d be happy to suggest index ETFs first and foremost now simply to avoid having to explain NTA discount / premium for the thousandth time.

Given recent trends there may be a lot of negatively in this thread relating to LICs. The more the merrier in my view as I want discounts, BIG discounts.

 

Still waiting to receive my cheque.

I understand the buying at a discount to NTA and how that would make an LIC much more attractive. How often does a quality LIC trade at a significant discount though without any significant underlying issues? Anyone willing to sell there LIC holding to me at a nice discount? Cheque will be mailed out.

 

Here’s something I put together some time ago but it needs updating to address more of the LIC negatives also. However it was meant to be a beginner’s guide but in hindsight there are further things that could be added / clarified thanks to the generous information shared by others here. I was going to update it but with so many Blogs around now writing about such things I haven’t bothered. And being a retiree I don’t have the time. See attached PDF.

@Snowball (Mr Cheque in the Mail) just posted this on his blog which might help also with NTA discount / premium:

A Complete Guide to LIC Premiums and Discounts - Strong Money Australia

 

Hi Master, let's put aside the simplicity, timing etc. aside for now.
if one can consistently buy old school LIC under the NTA value, does it make the investment far more superior (total performance) than ETF? of course, there is no guarantee in investment world but fundamentally, does it sound right?
Note: we are only comparing the low cost old school LIC & ETF.

 

I assume you mean Master in age only.

Very difficult question to answer given the role “it’s all about me” factor plays.

Taking your question literally, ignoring personal objectives, and taking into account simple maths of active vs passive the odds likely favour a traditional index ETF outperforming Total Return wise. Unless perhaps the NTA discount is of a reasonable size. Then there’s the problem of getting these LICs regularly below NTA for those dollar cost averaging. But there is no guarantee, only probabilities. LICs have outperformed in the past, they may do again. Unlike the vast majority of fund Mgrs there is bugger all fee hurdle to overcome. The biggest challenge is likely due to the theory of positive skew ie failing to identify all the small number of biggest winners.

However what are you investing for? God knows what the index might hold over time, these have no choice about what they hold. If a mother of all speculative tech boom arises well into the future the index can’t avoid it. Is that what each individual wants? Perhaps a “growth” focused investor might enjoy the ride but I doubt the “income” focused investor will!

Index investing doesn’t cater for any specific objective, you get what you get at any given time. The older LICs however invest with predominantly a single objective - a reliable, growing dividend stream. Hence their investment portfolio will reflect that. As a result these LICs might underperform the index at times, for long periods of time or forever, nobody knows.

There will likely be no winner in the LIC vs Index ETF debate as we’re all different in what our investing objectives are.

There’s no doubt though that if one is after great simplicity, not having to deal with SPPs (dilution?), NTA and knowing that they’ll never underform the index (less tiny fee) then a plain vanilla index ETF will likely appeal most.

That said I’m still a fan of the old style LICs and believe they have an important role in our personal portfolio as income focused investors.

And finally the great thing is you don’t have to choose one or the other. I choose to own both and sleep better at night as a result.

 

Damn I feel like Alan Bond, I owe everybody!

 

Only you can answer what is more important as you’ll have your own goals.

If maximum possible performance is your top priority then I’d say the index has the best chance of providing that.

But as @Nodrog summed up very well if you’re more of an income focused investor and happy to follow the dividend approach regardless of out/underperformance and are more comfortable living off that type of investment then maybe that’s the right choice for you. Or both if you the characteristics of both.

 

Low cost LIC's were here well before the Low Cost Index Funds and ETF's

 

Sir Donald, ARG board from memory. Yep these things have been around long before index funds. I expect they’ll still continue to be around for generations to come.

 

http://www.thefiexplorer.com/2019/0...-view-of-listed-investment-company-investing/

Some quite convincing arguments infavor of etf here

 

Very much so. He didn't pay people either I understand.

 

Thank you all for the opinions expressed. Listening to the different point of views and from the comparisons I’m doing it looks like index funds would be the way to go. I like to top up regularly via lump sum and monthly buy ins. It would be too much effort to try and sit around waiting for discounted entry points. Would rather spend the time and head space earning as much as possible and putting it to work in an index fund as soon as possible.
Might as well continue to hold the managed funds I’m in now and work on bringing my index holdings to 50% of the total equities portfolio. I already hold VAS though the wholesale version through the wrap. Think I’ll add VGS but again the wholesale version through the wrap. Also wouldn’t mind holding some VTS to slightly increase US holding. Though it looks like VTS only has a ETF version and can’t be picked up through the wrap. Being the management fees for the wholesale funds I purchase through the wrap are the same as the ETF version is there any benefit in the wholesale fund over the retail ETF funds?

 

@Big Al how many points are you paying for the wrap?

 

I wasn’t going to read it but thought I would given others prompting. The author has put a lot of work into the post, it was a good read but nothing really new.

It certainly appears the author loves his index ETFs but I’m bewildered at the portfolio holding of three versions of the Vanguard Lifestrategy Diversified ETFs (Balanced, Growth, High Growth)? No doubt there’s a logical reason for it likely explained in other posts there but I’m not much of a blog follower given how many there are now.

 

ETF's have been in Oz twenty odd years. Has any one looked at using ETF's for performance (avg 13.1 over 100yrs, Oz market) then moved a large part of portfolio to a more income focused ff dividend LIC closer to retirement. Or would transaction, timing and tax costs kill that idea.

 

The title master cannot be earned just by the number of age. But wisdom and the amount of homebrew consumed over a lifetime.

Just like collecting the amount of LICs and ETFs over time. Anyhow, I listen to the same fundamental that you've been chanting in the other posts: buy LIC when SP < NTA otherwise ETF.
Since I'm not as wise yet, I must get some basic understandings sorted from 3 wise monkeys and @Nodrog you're included in the 3

Adding to this, my strategy to buy below NTA is using the DRP offered with discount from some of the LICs and taking opportunities when market drops, SPP, IPO etc. It has been working for me albeit with not as big capital and slow in nature. Otherwise, piling up cash reserve etc. I'm planning to add to ETFs in the near future.

 

Hey @The Falcon , couldn’t give you the exact figure of the top of head. I remember going over it when we opened up 3 years ago and it was tiered from what I recall. Remember it being high for under the 1mill mark then gets better as your balance increases. All I know is it’s to much. On my recent review over the last 12 months I paid over 3k in wrap fees for a balance of around 2.5-2.6mill. With the BT panorama wrap I’m moving over to the fee will be capped at $2046 annual regardless of the value held. This way I can also move the wife’s and my super wrap accounts across as well and it will only incur a $546 annual fee fixed for each of those accounts above the $2046 for the non super wrap. I also have a few individual share holdings that I can now load into the wrap without paying fees to have them there.

 

Are you referring to a particular ETF? Index ETF’s / managed funds ETF’s?