Two products which are available in the market for investors are LICs (listed investment companies) and managed funds. These two products are very similar but they also have their differences. In this article we discuss the definitions and differences of both.
What is an LIC (listed investment company)
Listed investment companies (LIC) are publicly listed companies with the main objective to actively manage money and outperform a benchmark. Investors can purchase these LICs on the stock exchange. When investors purchase LICs they are purchasing a share in the investment company similarly to buying shares in other listed businesses. These are closed ended investments meaning there are only fixed amount units available in the market. This differs from ETFs where the ETF provider can issue more units if they need to.
What is a managed fund?
A managed fund is a unit trust where investors combine their funds together and an investment manager uses this capital and actively manages it in trying to outperform the market. These are unlisted units which means they are not traded on the stock exchange. These investments are open ended which means there is no limit to how many investors the managed fund will take. However, if the managed fund becomes too large to maintain the funds objectives, they may close the fund off from new investors.
Differences between LIC and managed funds
- LICs have lower fees than managed funds
- LICs can offer dividends to the shareholder and these are usually franked but managed funds pay out distributions and investors pay tax on these at their marginal rate
- The prices of LIC are also determined by market sentiment whereas managed fund prices are determined by the net asset value of the underlying shares
- LICs can be traded on the stock exchange, managed funds can only be transacted directly with the fund manager
- LICs are closed ended, there is a fixed amount of shares available in the market. Managed funds are opened ended so there is no limit to how many investors can buy units unless the managed fund decides to close the funds to new investors because they can not otherwise maintain their core objectives
- Managed funds are transacted using their net asset values whereas LICs can be transacted throughout the day through the market price of the share
- The majority of LICs listed on the stock exchange only invest in Australian shares whereas there is a larger variety of asset classes and stock markets with managed funds
- LICs uses a company structure where as managed funds are unit trust
- Investors of LICs can simply sell their units on the stock exchange and receive sale proceeds in 2 business days where as managed funds may take 5 days to process the redemption
Lauren Hua is a private client adviser at Fairmont Equities.
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