Data from the online investment adviser has shown investors would have 20 per cent more money if they had invested in an Australian index ETF five years ago rather than one of the largest Australian share LICs.
LICs regularly trade at a discount on their asset value (on average 7 per cent), the report said, with investors falling prey to uncertainty about whether they’ll be receiving fair value when they buy and sell.
The average LIC one year return was shown to be 4 per cent, in comparison to the S&P/ASX 200 Accumulation Market Index return of 11.6 per cent while ETFs gave average returns of 11.4 per cent.
However many stockbrokers and financial advisers recommended listed investors to their clients as they are paid commissions via a “stamping fee,” Stockspot noted.
“Once the LIC is listed and the stockbrokers and advisers have collected their commissions most LICs trade well below their net asset value (NAV),” the investment manager said.
“LICs are another excellent example of a loophole in the Aussie investment industry that puts financial remuneration of the people selling investments over the financial wellbeing and best interest of their clients, everyday Australians.
“Given there is now $45 billion trapped in LIC products we think government needs to urgently act to ban commissions on all new LIC issuances so Australian consumers start to get better advice from their advisers and stockbrokers.”
Currently there are 114 LICs on the ASX, worth $45.1 billion. The segment grew by 10 per cent over the last year, as opposed to ETFs which grew by 30 per cent over the same period.
The oldest LIC is Australian Foundation Investment Company, which was reported to look over $7.5 billion in funds under management. Argo Investment comes in at second largest with FUM of $5.8 billion. Milton, Wilson Asset Management and BKI Investment Company all are around $1 billion in size.
Unlike managed funds, they have a company structure, so investors buy shares in the firm as opposed to units in a fund. They trade shares with each other – no one can sell shares in a LIC unless someone is willing to buy them at the offered price.
Not one LIC tracking broad global markets achieved higher returns than a global market index ETF over the past year, Stockspot’s research found.
The average management fee for an LIC was noted to be around five times that of a typical ETF, not including performance fees and additional tax on their higher portfolio turnover.
Nearly two-thirds of LICs invest only in Australian shares, Stockspot said with the remainder investing in global shares and bonds and a small number in infrastructure and property.
