We compare LICs vs ETFs, which is best?

Our comparison of popular ASX listed LICs to index ETFs.

Listed investment companies (LICs) used to be one of the best ways for an investor to gain access to a broad range of shares in one transaction.

Throughout the 1900s, ASX listed LICs became more popular with everyday Australians because of the diversification they offered across sectors and countries.

Fast forward to 2019 and the case for LICs no longer stacks up for investors when you compare them to exchange traded funds (ETFs). Our analysis reveals ETFs are superior in every measure; transparency, liquidity, certainty, fees, tax efficiency and most importantly, returns.

When you look at the data, this becomes even more shocking:

  • The average management fee of a LIC is over 1% p.a. (5x a typical ETF). This doesn’t even include performance fees and the tax drag of a LICs higher portfolio turnover.

See how our ETF portfolios have performed

Why are LICs still popular?

Unfortunately for investors, many stockbrokers and financial advisers continue to recommend LICs instead of lower cost index ETFs. This baffles us since ETFs have clear benefits over LICs, not least their lower fees, greater transparency and better performance.

As with most aspects of the finance industry, the motivation is largely self-interest. Stockbrokers and financial advisers are paid a healthy commission to recommend new LICs to their clients via a ‘stamping fee’.

Once the LIC is listed and the stockbrokers and advisers have collected their commissions most LICs trade well below their net asset value (NAV). 

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.

Stockspot has long campaigned about unfair fees in superannuation and managed funds. LICs are no different.

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.

What is a LIC?

A listed investment company (LIC) is an actively managed fund listed on the Australian Securities Exchange (ASX). Like a managed fund, LIC money is pooled together from investors to buy a range of investments.

Unlike managed funds, LICs have a company structure, so shareholders own shares in the company (as opposed to units in a fund). Investors buy and sell shares in the LIC to each other. This means no one can sell shares in a LIC unless someone is willing to buy them at the offered price. 

LICs pay company tax (currently 30%) on earnings and can choose to pay distributions to investors in the form of dividends, including any attached franking credits. 

There are 114 LICs on the ASX, worth $45.1b. The LIC market has grown by 10% over the past year, much slower than the 30% growth in ETFs over the same period.

Nearly two thirds of LICs invest only in Australian shares, with the remainder investing in global shares and bonds, and a small number in infrastructure and property.  

Most LICs trade at a discount to their Net Asset Value or NAV (average discount is 7%). For example if the investments inside a LIC are worth $1, a typical LIC would trade on the ASX at $0.93.

Here in lies one of the main problems with LICs: investors rarely get what they pay for as they rely on other investors in the same LIC to buy off them when they decide to sell.

This discount has increased over the last few years which has hurt their overall performance. These discounts may never close, trapping investors in LICs that have both underperformed and trade at a discount to their asset value.

Why is the share value of a LIC different from the underlying value of its assets?

One reason for this difference is the shareholders’ view of the additional value brought by the fund manager. If LIC shareholders think that the fund manager will provide no additional value the LIC will trade at a discount to the value of the underlying assets.

The size of the discount depends on the management fee – which is a drag on future returns. For example, if the underlying assets are expected to produce a 10% p.a. return and the management fee is 1% p.a. the shares are likely to trade at a 10% discount (given the total return after fees is 9%).

If shareholders think that management can deliver an additional 1% p.a. return and the management fee is 1% p.a. then the shares will trade at the value of the underlying assets.

Most LICs trade at a discount to their Net Asset Value (NAV) as shown in the following table of all the LICs listed on the ASX. Note that the average discount to NAV is around 7%. 

However, many LICs trade at discounts much greater than just taking into account their management fee. This is partly because investors have formed the view that management will underperform the market and partly because of the liquidity of the LIC itself. A seller of an unloved and ignored LIC may have trouble finding buyers at any price.

Comparing LICs vs ETFs

We recently discussed the key differences between ETFs and LICs and also provided some context as to why ETFs have been growing faster.

TransparencyETFs must disclose their portfolio at the end of each trading day.LICs do not disclose their portfolio until a reporting deadline, generally monthly. The portfolio which is disclosed is already out of date.
LiquidityETFs have market makers which stand in the market to buy or sell at prices very close to NAV. Indicative NAV (iNAV) is updated every 30 seconds allowing the market makers to trade at close to real time values.LICs rely on buyers and sellers for liquidity.
TaxETFs put taxable income in the hands of the unitholder and there is less turnover of underlying assets and therefore lower realisation of capital gains. LICs are taxpaying entities which pay dividends. The investor is therefore at the mercy of the LIC dividend and franking credit policy as well as realisation of capital gains.

Tax differences between LICs and ETFs

LICs pay company tax on their income before distributing it to shareholders. This means LIC investors are entitled to receive fully franked dividends.

However, LICs tend to have much higher portfolio turnover than index ETFs, which creates an ongoing ‘tax drag’ from realising more capital gains each year.

ETFs distribute income on a pre-tax basis and pass on any franking credits received by Australian companies they’ve invested in. Distributions from the Vanguard Australian Shares Fund (VAS) are about 80% franked.

The creation and redemption process for ETF units is also tax efficient since there is no asset sale and no capital gains when units are created or redeemed. The ETF issuer can select which shares to use, so it will pick those with a low cost base, reducing the ETF’s tax burden.

The reason most LICs underperform is high fees

On average LIC costs are 5x more than a typical index ETF and that’s before the LICs costs of buying and selling shares, performance fees, tax impacts of high portfolio turnover and the dilution impact of LICs issuing more shares.

The impact of high costs becomes more apparent with each passing year as LICs find it more and more difficult to generate sufficient returns to make up for the drag of their costs.

The below chart shows that $10,000 invested in one of Australia’s largest LICs 5 years ago would be worth roughly $12,500 today including dividends and capital growth. That same amount invested in the Vanguard Australian Shares Index ETF (VAS) would be worth over $15,000.

This is one reason why we have advised clients since 2014 to invest in the Vanguard Australian Shares Index ETF (VAS) rather than use LICs that invest in Australian shares.

Performance of the largest Australian share market LICs vs ETFs

Many Aussie investors would be familiar with the Australian Foundation Investment Company Limited (AFI), which is by far the largest and most popular LIC with $7.5b in FUM. It’s also the oldest LIC in the market having listed in 1936.

Argo Investment Limited (ARG) comes in a close 2nd in popularity after building up FUM of $5.8b, listing over 70 years ago. Milton, WAM and BKI are also all over $1 billion in size.

TickerNameFUM ($b)1 Yr Return5 Yr Return (p.a.)
S&P/ASX 200 Accumulation (market index)11.6%8.9%
AFIAustralian Foundation Investment Company Limited$7.5b6.8%4.5%
ARGArgo Investments Limited$5.8b6.0%5.3%
MLTMilton Corporation Limited$3.2b7.1%5.1%
WAMWAM Capital Limited$1.2b-9.0%7.7%
BKIBKI Investment Company Limited$1.1b8.9%3.7%
Average LIC Return4.0%5.3%
VASVanguard Australian Shares Index ETF$3.9b11.4%8.7%
STWSPDR S&P/ASX 200 ETF$3.9b11.4%8.5%
Average ETF Return 11.4%8.6%
Returns as of June 2019 (Source: ASX)

Research by S&P/SPIVA that shows that 80% of active Australian share funds have underperformed over 15 years and this is also evident with LICs with almost all of them underperforming the index and ETFs. 

89% of Australian share LICs underperformed the Vanguard Australian Shares Index ETF (VAS) over the last year. The figure is even worse over the long term, with 95% (19 in 20) of broad Australian share LICs failing to beat the ETF over 5 years.

Performance of the largest global share market LICs vs ETFs

It’s similar story for global share LICs. Not a single one of the 18 broad global share LICs beat the Global 100 ETF over the last year. Worse still, 62% of global share LICs had negative returns while the Global 100 ETF had a positive year returning +14.6%!

TickerNameFUM ($b)1 Year Return
MSCI World Ex Australian Index Unhedged (market index)12.0%
MGGMagellan Global Trust$2.2b13.6%
MFFMFF Capital Investments Limited$1.6b9.8%
VG1VGI Partners Global Investments Limited$1b6.6%
LSFL1 Long Short Fund Limited$0.9b-25.3%
FGG*Future Generation Global Investment Company Limited$0.5b-2.2%
Average LIC Return0.5%
IOOiShares S&P Global 100 ETF$1.6b14.6%
VGSVanguard MSCI Index International Shares ETF$1.7b11.5%
Average ETF Return13.1%
*HM1 was the 5th biggest global share LIC with $0.6b in FUM but does not have a 1 year performance track record yet. FGG was used instead in the table for comparison purposes. Returns as of June 2019 (Source: ASX)

We’ve published articles in the past about Australians preference to invest in Australian shares. For investors wanting exposure to shares in global markets like the USA, Europe and Asia, ETFs have more consistent performance and are a better, transparent way to access these markets.

Sometimes a LIC will perform well but performance tends to come and go. According to S&P, only 1 in 10 U.S. share funds have beaten the index over 15 years.

This is why we advise clients to invest in the iShares S&P Global 100 Index ETF (IOO) rather than use LICs that invest in Global shares. 

Best performing LICs in 2019

Only one third of all LICs on the ASX had a positive 1 year return to 30 June. The average LIC return was -4% compared to the average ETF return of +8%. The returns within asset classes tell the same story.

The best performing LIC was the Bailador Technology Investments Limited (BTI) delivering a return of 42% return over the year. The LIC invests in a range of tech startups and private equity deals.

A strong year for assets like infrastructure meant Argo Global Listed Infrastructure Limited (ALI) and URB Investments Limited (URB) returned a total of 29% and 20% respectively.

High dividend yielding strategies such as Clime Capital Limited (CAM) rounded out the top performers over 1 year but have underperformed the market benchmark over longer periods with a 5 year return of just 5.9% p.a.

ASX CodeLIC Name1 Year Return
BTIBailador Technology Investments Limited41.9%
ALIArgo Global Listed Infrastructure Limited28.8%
CAMClime Capital Limited21.6%
URBURB Investments Limited19.9%
PL8Plato Income Maximiser Limited19.7%

Worst performing LICs in 2019

The worst performing LIC was the 8I Holdings LTD (8IH) which lost 52% over the year. Its fellow value manager, the Forager Australian Shares Fund (FOR), also had a poor year, falling 39%. Forager was previously a star fund with top quartile returns. 

Lowell Resources Fund (LRT) lost 39% over the year, despite many resource ETFs being up almost 15%. Cadence Capital Limited (CDM) was the fourth worst performer declining 36% over the year and -6.4% p.a. over the last 5 years.

Finally, the HHY Fund (HHY) lost 35% and may soon be shutting down after a proposed change of investment manager and responsible entity. A fund closure or merger due to poor active performance is another risk of owning a LIC.

ASX CodeLIC Name1 Year Return
8IH8I Holdings Ltd-52.0%
FORForager Australian Shares Fund-39.4%
LRTLowell Resources Fund-39.3%
CDMCadence Capital Limited-35.9%
HHYHHY Fund-34.8%

Stockspot’s view

Every year a couple of LICs perform well, but fund manager performance is inconsistent and almost impossible to predict. Of the top 25% of active Australian share funds in 2014, only 1.3% remained in the top quartile by 2018. Zero active Australian small cap fund managers remained in the top quartile from 2014 to 2018.

LICs served a purpose about 20 years ago but the investment world has moved on. In a country like Australia it is incomprehensible that stock brokers and financial advisers are not regulated to act in the best interests of their clients. If this were the case LICs would no longer continue to operate or be forced to modernise.

We urge the government to ignore the loud voices and deep pockets of the LIC lobby groups. It should move to act in the best interest of investors and close the LIC loophole by banning stamping fees and commissions.

LIC performance tables

Australian share LICs

ASX CodeNameFee %*1 Yr Return3 Yr Return (p.a)5 Yr Return (p.a)
8EC8IP Emerging Companies Limited1.25-12.9%-4.8%
ABWAurora Absolute Return Fund1.49
ACQAcorn Capital Investment Fund Limited 0.95-5.6%9.4%6.1%
AEG Absolute Equity Performance Fund Limited1.50-21.7%-7.0%
AFIAustralian Foundation Investment Company Limited0.186.8%8.3%4.5%
AGMAustralian Governance & Ethical Index Fund0.19
ALF Australian Leaders Fund Limited2.72-8.0%-10.2%-6.9%
AMHAMCIL Limited0.77-0.7%2.2%3.4%
ARGArgo Investments Limited0.186.0%7.5%5.3%
AUIAustralian United Investment Company Limited0.139.4%13%6.9%
AUPAurora Property Buy-Write Income Trust1.03-30.3%-27.3%
AFYAustralian Enhanced Income Fund0.859.0%
BAFBlue Sky Alternatives Access Fund Limited1.200.5%-9.3%-1.4%
BELBentley Capital Limited 1.0-17.5%-12.2%-6.3%
BKIBKI Investment Company Limited0.198.9%4.7%3.7%
BSNBisan Limited
BSTBarrack St Investments Limited1.001.5%4.0%
BTIBailador Technology Investments Limited1.7541.9%-2.6%
CAMClime Capital Limited1.0021.6%15.1%5.9%
CBCCBG Capital Limited.0017.5%7.9%
CDMCadence Capital Limited1.00-35.9%-9.3%-6.4%
CIEContango Income Generator Limited0.95-13.8%0.8%
CINCarlton Investments Limited0.10-0.9%3.7%6.9%
CLFConcentrated Leaders Fund Limited2.4010.1%12.3%5.8%
CVFContrarian Value Fund Limited1.00-9.6%6.2%
DJWDjerriwarrh Investments Limited0.398.4%0.3%-0.4%
DUIDiversified United Investment Limited0.1710.3%14.4%8.6%
ECLExcelsior Capital Limited1.40-8.1%16.0%4.7%
EEFEvans & Partners Australian Flagship Fund1.18
FGXFuture Generation Investment Company Limited1.00-3.3%
FORForager Australian Shares Fund1.88-39.4%
FSIFlagship Investments Limited0.0010.4%10.9%7.2%
GC1Glennon Small Companies Limited1.00-13.7%-1.8%
HHYHHY Fund0.75-34.8%-27%-17.3%
HMLHenry Morgan Limited2.00
IBCIronbark Capital Limited0.655.2%7.6%2.7%
KATKatana Capital Limited1.251.3%1.8%-0.1%
MA1Monash Absolute Investment Company Limited1.500.6%-4.6%
MAXMillinium’s Alternatives Fund0.20
MIRMirrabooka Investments Limited0.70-1.8%2.0%4.6%
MLTMilton Corporation Limited0.147.1%7.9%5.1%
MVTMercantile Investment Company Ltd0.75-11.4%2.3%2.8%
NACNAOS Ex-50 Opportunities Company Limited1.75-7.4%-0.9%
NCCNAOS Emerging Opportunities Company Limited1.25-25.0%0.1%2.3%
NGENGE Capital Limited3.20-13.4%13.2%19.3%
NSCNAOS Small Cap Opportunities Company Limited1.25-19.5%-11.3%-4.7%
OEQOrion Equities Limited
OPHOphir High Conviction Fund1.23
OZGOzgrowth Limited1.00-14.3%6.7%-1.9%
PICPerpetual Equity Investment Company Limited1.00-5.2%9.5%
PL8Plato Income Maximiser Limited0.8019.7%
QVEQV Equities Limited0.90-6.0%2.2%
RYDRyder Capital Limited1.252.4%10.5%
SECSpheria Emerging Companies Limited1.00-6.4%
SNCSandon Capital Investments Limited1.25-3.6%8.4%3.6%
TOPThorney Opportunities Ltd0.75-0.6%7.0%10.3%
URBURB Investments Limited0.5019.9%
WAAWAM Active Limited1.00-4.9%3.9%0.4%
WAMWAM Capital Limited1.00-9.0%3.2%7.7%
WAVWAM Research Limited1.00-6.3%5.5%10.0%
WHFWhitefield Limited0.3511.8%9.9%7.3%
WICWestoz Investment Company Limited1.28-6.7%14.1%1.8%
WLEWAM Leaders Limited1.000.6%3.3%
WMIWAM Microcap Limited1.00-10.7%

Global share LICs

ASX CodeNameFee %*1 Yr Return3 Yr Return (p.a)5 Yr Return (p.a)
8IH8I Holdings Ltd-52.0%-57.6%
AIBAurora Global Income Trust1.33
AIQAlternative Investment Trust0.7511.8%-1.9%3.0%
ALIArgo Global Listed Infrastructure Limited1.2028.8%9.6%
APLAntipodes Global Investment Company Ltd1.13-16.0%
BHDBenjamin Hornigold Limited3.00
CD1Cordish Dixon Private Equity Fund I0.3315.9%
CD2Cordish Dixon Private Equity Fund II0.339.7%6.9%10.8%
CD3Cordish Dixon Private Equity Fund III0.33-4.9%
EAFEvans & Partners Asia Fund1.605.4%
EAIEllerston Asian Investments Limited0.95-11.8%5.7%
EGDEvans & Partners Global Disruption Fund1.5417.8%
EGFEvans & Partners Global Flagship Fund1.2517.8%
EGIEllerston Global Investments Limited0.75-10.5%3.5%
FGGFuture Generation Global Investment Company Limited1.00-2.2%8.7%
FPCFat Prophets Global Contrarian Fund Ltd1.033.3%
FPPFat Prophets Global Property Fund1.033.3%
GFLGlobal Masters Fund Limited0.85-8.7%12.0%8.7%
GVFGlobal Value Fund Limited1.50-3.4%3.1%
HM1Hearts and Minds Investments Limited1.50
LRTLowell Resources Fund2.16-39.3%
LSFL1 Long Short Fund Limited1.40-25.3%
LSXLion Selection Group Limited1.5013.3%3.7%2.5%
MECMorphic Ethical Equities Fund Limited1.25-14.8%
MFFMFF Capital Investments Limited1.259.8%17.1%17.5%
MGGMagellan Global Trust1.3513.6%
MMJMMJ Group Holdings Limited-26.9%0.0%
PAFPM Capital Asian Opportunities Fund Limited1.00-13.2%4.9%2.7%
PAIPlatinum Asia Investments Limited1.10-12.6%9.0%
PE1Pengana Private Equity Trust1.25
PGFPM Capital Global Opportunities Fund Limited1.00-15.2%13.4%5.3%
PAIPengana International Equities Limited1.77-3.8%-2.0%7.8%
PMCPlatinum Capital Limited1.50-19.9%4.8%3.2%
RF1Regal Funds Management Limited1.50
SVSSunvest Corporation Limited
TEKThorney Technologies Ltd0.75
TGFTribeca Global Natural Resources Limited1.50
TGGTempleton Global Growth Fund Limited1.00-8.5%6.5%3.2%
VG1VGI Partners Global Investments Limited1.506.6%
WGBWAM Global Limited1.25-10.9%
WQGWCM Global Growth Limited1.254.2%
ZERZeta Resources Limited0.50-12.3%25.4%-11.7%
IOOiShares S&P Global 100 ETF0.4014.6%16.3%13.5%
VGSVanguard MSCI Index International Shares ETF0.1811.5%14.2%

Bond LICs

ASX CodeNameFee %*1 Yr Return3 Yr Return (p.a)5 Yr Return (p.a)
AYKAustralian Masters Yield Fund No 4 Limited0.59
AYZAustralian Masters Yield Fund No 5 Limited0.65-0.5%
GCIGryphon Capital Income Trust0.968.0%
MOTMCP Income Opportunities Trust1.03
MXTMCP Master Income Trust0.866.6%
NBINB Global Corporate Income Trust0.85
PCIPerpetual Credit Income Trust0.88
QRIQualitas Real Estate Income Fund1.54
IAFiShares Core Composite Bond ETF0.209.5%4.1%4.9%
VIFVanguard International Fixed Interest Index (Hedged) ETF0.206.5%2.5%
*Does not include performance fees. Not all fees were publicly available via ASX or through the LIC provider

Stockspot finds the best ETFs in each asset class and automates repetitive tasks like rebalancing and re-investing dividends to keep your ETF portfolio healthy and your costs low.

Investment Associate

Marc has previously worked for Morgan Stanley, AMP and KPMG. He holds a Bachelor of Business (Finance/Accounting) from the University of Technology Sydney (UTS), and has completed his Chartered Financial Analyst (CFA) Level 1.

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