LIC diversification requires greater scrutiny

LIC diversification allocation

The actual portfolio diversification provided by an allocation to a listed investment company requires careful examination.

Investors have been advised to consider the actual portfolio diversification that can be achieved by having an allocation to a particular listed investment company (LIC) in their wealth portfolios.

Speaking during the recent Australian Shareholders’ Association Virtual Investment Forum, Sharesight chief executive Doug Morris noted investors should consider the underlying factors of a LIC as the diversification might not be what it seems.

“When you purchase an LIC, you’re getting instant diversification and your asset allocation will change. I would say LICs lack diversity and that may be a point that people disagree with me on. But the Australian Securities Exchange (ASX) is well known to be dominated by resource companies and banks,” Morris said.

“Over time, returns are derived from appropriate asset allocation. For example, where your money is allocated, but also active management as well. It’s about a 50/50 split between the quality of the manager you’re choosing – the LIC investment team – and whether or not you invest in the right asset class.

“If you hold an LIC, ask yourself: ‘So you’re paying for an LIC, but what activity are you actually paying for?’”

He further emphasised those approaching retirement need to start considering how their asset allocation can provide real returns. To that end, the equity styles produced by LICs can sway towards large capital or small-cap exposure.

“When it comes to small-cap companies or technology companies … they may be doing the research that [investors] can’t do individually and geography matters as well. If you’re primarily an ASX investor and you’re buying an LIC, you’re going to get double the exposure,” he said.

“If you are approaching or you’re in retirement and you’re looking to crystallise some of those gains, you can see the massive range in return when it comes to being exposed to large and small company stocks.”


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