LIC vs Index

Discussion in 'Share Investing Strategies, Theories & Education' started by Big Al, 21st Jan, 2019.

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  1. Nodrog

    Nodrog Well-Known Member

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    Ah grasshopper you must first learn to become one with the LICuor:):

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    Nodrog (the third)
     
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  2. R-Hub

    R-Hub Well-Known Member

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    Mainly VAS in Aust. If you can get the market returns less a small fee.
     

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  3. Big Al

    Big Al Well-Known Member

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    That’s exactly where I’m going. I’m planning on re balancing my equities holdings by putting all future capital until at least half my holdings are in index funds. Though I will split between VAS , VGS and VTS.
     
  4. Nodrog

    Nodrog Well-Known Member

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    Why VTS? VGS is around 60% US and VTS is domiciled in the US unlike VGS which is domiciled in Australia. Seems like unnecessary duplication / complication.

    If you want more International rather than adding additional mostly US large / mid caps there’s greater diversification available through asset classes like global listed property / infrastructure, US / International small caps, emerging / Asian markets etc.
     
    Last edited: 22nd Jan, 2019
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  5. Big Al

    Big Al Well-Known Member

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    I was looking at a small holding in VTS above holding VGS to increase weighting of internationals to US predominantly. With regards to being US dominiciled what does that mean for an australian investor / what are the negatives?
     
  6. Nodrog

    Nodrog Well-Known Member

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    US domiciled may possibly result in Estate Tax, W-8Ben form required, messier tax but being on a platform might negate some of these issues. Do you always want to be held captive to a platform with FP all your life? This topic has been discussed plenty of times on various forums with no clear answer to the estate tax issue. Many do feel uncomfortable with US domiciled funds though. I certainly do. @oracle might like to add further?

    Simplier, cleaner and still dirt cheap option if you want locally domiciled ETFs are IVV (S&P500) and IJR (US small caps). Being younger perhaps increased weighting to US small caps might interest you more than adding VTS which is heavily weighted to large caps.

    Note the very low fee which is incredible for locally domiciled US focused ETFs:

    Investment Management, Risk & Advisory Services | BlackRock (IVV, Fee 0.04%)

    Investment Management, Risk & Advisory Services | BlackRock (IJR, Fee 0.07%)
     
    Last edited: 22nd Jan, 2019
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  7. Big Al

    Big Al Well-Known Member

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    Thank you for today’s lesson sir. Will definitely look at the other options you mentioned. VTS sounds like more hassle then it’s worth.
     
  8. Nodrog

    Nodrog Well-Known Member

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  9. APINDEX

    APINDEX Well-Known Member

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    I also noticed that and couldn't help thinking after seeing the total allocation including Bitcoin(??!!) gold etc then LIC V ETF would be the least of the bloggers worries??
    of course my thoughts only..
     
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  10. Nodrog

    Nodrog Well-Known Member

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    That thought did enter my head also but I was trying to be more polite:).
     
  11. APINDEX

    APINDEX Well-Known Member

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    I certainly hope I was not coming across as rude just seemed weird to me as the bloggers points were valid but his portfolio certainly didn't reflect the view...

    My as always amateur view is rather than vs. why can't it be + like you say..

    Better to have 1 option than none and better to have 2 options than 1 to be able to construct a well diversified AU portfolio embrace anything that adds value I certainly intend to have both VAS and some of the old traditional LICS on my portfolio.. but then again as someone wise once said guess it's all about me! ;)
     
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  12. Nodrog

    Nodrog Well-Known Member

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    I only skimmed the blog post and as mentioned elsewhere there didn’t appear to be anything other than the usual arguments. Unless I missed it the blog entry could have been made more interesting by discussing some of the lesser known LIC negatives.

    Rather than reply to the bloggers post I prefer to use this forum. The following issues have been discussed here in the past but this new “Index vs LIC” thread seemed like an ideal location to repeat them.

    Particularly in the case of the older, low turnover LICs that have been around a very long time new investors in these LICs are buying into large existing embedded capital gains positions which may inflict a realised CGT event upon them in the future which they were not party to. Generally this amount of embedded gains is the difference between pre and post-tax NTA.

    These LICs say that investors should look at pre-tax NTA rather than post-tax NTA as they have no intention of selling but the reality is they do sell which can at times be anything up to roughly 10% of the portfolio each year. This will become an even greater concern if Labor’s proposed policy to halve the CGT discount is legislated. However due to recently introduced AMIT in the case of ETFs and Listed / Unlisted Trusts new investors are no longer unfairly taxed when existing investors sell their units.

    Another potential disadvantage of LICs (or any actively managed fund) vs passive index ETFs is that of “positive skew”.
    Bloomberg - Are you a robot?

    Further there is the other potential negative in the case of some LICs such as BKI recently where a discounted Share Purchase Plan can result in “dilution” of existing shareholders. Dilution can be a concern escpecially for those with limited new cash to invest who hold a number of LICs if they can’t afford to participate in all discounted SPPs.

    I could likely find a few more negatives but those are a few that popped into my mind.

    @The Falcon did a great job of succinctly covering a number of the LIC vs passive index ETF negatives in his excellent post found here:

    Listed Investment Companies (LICs) Q1 2018

    Now over to you @Snowball for your upcoming blog entry in response to the FiExplorer’s “skeptical view of LIC’s” blog post. No pressure but LIC devotees the world over, including me, are relying on you to successfully put forward counter-arguments to all the LIC negatives mentioned:D. May the force be with you:). I refuse to assist as your cheque’s keep bouncing:(.

    PS: I just skimmed thefiexplorer’s post again and note he did cover “positive skew”:


     
    Last edited: 23rd Jan, 2019
  13. Big Al

    Big Al Well-Known Member

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    Thank you all for your opinions on this topic. After taking in the opinions ( See how I don't use the word advice but opinions so I cant sue anyone when it all goes bad ) of my de facto PC financial non advisers, maybe we can refer to contributors as Financial Opinion Givers FOG. I spent some time going over it with the Financial advisor yesterday and have made some decisions with strategy and allocation moving forward. Might start a separate thread outlining that and hopefully getting FOG feedback on the strategy.
    I would send out cheques to all the FOG for there services but then that could constitute advice and we don't want that. Maybe I can send out slabs of beer instead. :D
     
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  14. Nodrog

    Nodrog Well-Known Member

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    Most new members here after reading enough of others ramblings usually feel like they’re lost in the fog:).
     
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  15. Nodrog

    Nodrog Well-Known Member

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    That would be useful thanks as it makes for interesting discussion compared to the usual guff. And gives some insight into whether FPs are genuinely adding value to simple strategies easily implemented by self directed investors.

    @Frank Manno the last person to do this generated an excellent discussion. Here’s the portfolios suggested to him by two different FPs:

    My portfolio. Does this look ok?

    0A1B2258-957F-4E3B-8E98-581BE57ABC7E.jpeg

    But to avoid thread drift we await your new thread, if comfortable in sharing of course, @Big Al.
     
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  16. Big Al

    Big Al Well-Known Member

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    yeah definitely keen to do a thoughts on my portfolio thread. I like to get the opinions of different people who have had there own experiences and lessons learnt through there journey.
    Will put it together by this afternoon.
     
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  17. dunno

    dunno Well-Known Member

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    Risk / reward outcome is always impacted by the price you pay.

    LICs or ETF’s? Every dog has its day.

    Knowing the price where LIC’s make more sense than ETF’s is the skill.

    Simply Buying LIC’s at a “NTA” discount is not a sufficiently robust way to beat the index. The current market discount/premium is the markets best guess at equalising the future returns. You must know better than the market and recognise when the discount is overdone for your particular investing duration – just being able to see that the discount exists and/or how it compares to history is not enough.

    If you have a realistic skill set to outsmart the market – be selective of what you buy and when you buy it otherwise just buy ETF’s because by design it tracks the market efficiently or alternatively buy LIC’s if you like their risk/active management profile irrespective of the discount/premium because you acknowledge the market collective is attempting to price them equivalently to the risk adjusted return of the index, better than you can.

    Thinking you can outsmart the market in relation to LIC’s discounts/premiums is on most occasions’ hubris. Surprisingly enough committed by people who are interested in LIC’s or ETF’s in the first place because they recognise the hubris of trying to outperform the market.


    [​IMG]
     
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  18. Nodrog

    Nodrog Well-Known Member

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    Generally I would agree but one needs to consider that there is a disproportionate number of retail investors in quite a few LICs many of whom are clueless other than perhaps judging each LIC based on its yield:rolleyes:.

    I don’t consider myself any great expert but as the likes of @Ianvestor will perhaps agree great opportunities do arise periodically due to mis-pricing. Over the decades I’ve taken advantage of some excellent NTA discount opportunities. But I agree just regularly buying a LIC because it’s at a discount without engaging the brain is unlikely to result in outperformance of the index if that’s one’s goal. Even then there’s no guarantee of course. But your key words “on most occasions” for the negative would be hard to disagree with.

    With passive, low cost index ETFs now available I do generally apply a higher hurdle to LICs when choosing which of the two to buy when wanting to invest. But then my entire objective of investing does not centre around outperforming the index. Yes here it comes, the most important factor of success for any investor when it comes to staying the course and sleeping well at night is not about whether one’s portfolio is outperforming some index but comes back to the SK rule of “it’s all about me”:).
     
    Last edited: 23rd Jan, 2019
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  19. Redwing

    Redwing Well-Known Member

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    W8BEN :D

    I still have my VTS/VEU but new funds now go into VGS

    [​IMG]

    As everyone else is getting a cheque from SMA I thought i better do my bit :D

    International Shares for Aussie Dividend Investors – Where Does It Fit?
     
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  20. Nodrog

    Nodrog Well-Known Member

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    IT’S ALL ABOUT ME

    Whilst initially trying to decipher @Big Al ’s paragraphless post with beer in hand a few thoughts entered my mind. In particular SK’s profound saying of “it’s all about me”. I know we joke about it at times but I think it really is at the heart of how we might each invest.

    @dunno, firstly I’m a huge fan of your extraordinary knowledge / posts. Obviously you strongly favour index ETFs admitadly for many reasons but I gather one important reason being the huge difficulty the vast majority of investors have in outperforming the index.

    From what I recall you invest “directly” in Australian shares. But is it guaranteed that over the long term this will outperform the index? It would appear the odds are against it. However you enjoy it.

    You also invests in the Vanguard’s rule based “value” factor ETF in the hope that based on historical data there will be times where value outperforms. It also provides rebalancing opportunity with VGS. Maybe it will zig when the other zags to smooth capital volatility or improve risk adjusted returns.

    However there’s no guarantee the addition of VVLU will result in outperformance of the main global cap weighted index. Value can underperform for very long periods of time. In the case of Vanguard’s value Fund / ETF there has been limited interest hence there’s a real possibility these funds could close at some stage resulting in an unwanted CGT event.

    So could it be said the main goal rather than the overall portfolio outperforming the main indexes is in fact “it’s all about me”?

    Then I get back to myself investing in LICs as well as ETFs. The older large LICs have been generally less volatile than the market at times falling less in gloom but rising less in boom. They provide excellent rebalancing opportunities at times against the index ETFs due to NTA discount / premium. There have been periods in the past where they outperformed the index. Their dividend focus also provides a value focus albeit generally considered a weak one. The likelihood of the older LICs ever closing is extremely remote. The reliability / smoothing of dividends although it can be done by using one’s own cash buffer can be very appealing at times especially during events like the GFC. There are more reasons in our situation but that’s a few.

    In my case there’s no guarantee the combination of LICs and ETFs will outperform a passive index only approach. But again it comes back to “it’s all about me”:).

    @dunno would love to hear your view on this as psychology of investing fascinates me. Of course I may also have have your situation totally wrong?
     
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