Investing in LICs and LITs

LIVs can help you diversify your portfolio across asset classes, sectors and geographies that otherwise could be difficult to access directly. For example, there are LIVs that cover international shares, emerging markets, specific sectors, corporate bonds, government and semi-government bonds and commodities.

For example, if your portfolio is comprised primarily of Australian shares, you can easily diversify your portfolio by adding a LIV that covers international shares.

Experienced professional investment managers actively manage the portfolio with the aim of generating above market returns. 

Expert investment management aims to deliver a better performance than the market. Investing in a LIV gives you exposure to the wider range of styles and strategies used by professional managers – including investment capabilities from around the world. You can also access investments where it is difficult for individual investors to gain research insights, such as small caps, alternative assets, fixed income and emerging markets.

LIVs can change in value as the underlying assets change in value. Depending on the type of fund and the investment objective of the manager, investors can earn returns through price growth and dividends/distributions.

As LIVs are close-ended vehicles, they issue a fixed number of shares or units on initial public offering (IPO) and investors buy and sell those shares or units on ASX. 

A benefit of a closed-ended structure is that it allows the fund manager to focus on long term investment objectives, rather than manage daily cashflows generated by investors seeking to buy and sell their holdings. A further benefit is that there isn’t the risk that the asset quality of the fund could dilute in the event the fund becomes popular. 

It is possible to change the number of shares or units on issue. LIVs can issue new shares or units to increase the number on issue, or conversely, it can cancel or buy-back shares or units to reduce the number of shares or units on issue.

Smaller LIVs may not have the liquidity of larger LIVs, particularly if they invest in niche sectors. Consequently they may trade at substantial discounts to its NTA and you may not be able to sell your LIV at a price that you would like.

While investment managers try to outperform the market or sector in which they invest, there is a risk that the fund may underperform the market or decline in value, affecting your return.

Risk that a government or a regulator may introduce regulatory or tax changes which can affect the value of securities in which the fund invests, the value of the shares/units or the tax treatment of the fund.

Certain countries or regions may be subject to additional degrees of market volatility, or economic and political instability. This may reduce or preclude the ability to trade securities or negatively impact a security’s value.

Currency risk is a consideration when investing globally. A weak Australian dollar will increase the value of investments held in non-Australian dollars. On the other hand, if the Australian dollar rises, the value of investments held in non-Australian dollars will fall; all other factors being equal.

Funds that use derivatives are subject to particular risks. Some funds for example may use some types of over the counter (OTC) derivatives that are not subject to central counterparty clearing arrangements and therefore have a higher exposure to counterparty risk.

Some funds may also carry additional risks, depending on the strategy they use or the assets they invest in. For example, some funds may use borrowing or leverage, which may increase risk. To understand fund-specific risks, read the prospectus or product disclosure statement and seek independent advice from a professional adviser before investing.