Closed-end fund in Australia

What it is

A company whose only business is owning investments. It raised money once, issued a fixed number of shares, and those shares now trade on the exchange between investors. Because the share count does not change, the share price can sit above or below the value of what the fund holds, called a premium or a discount.

The discount is the interesting part. Buying at a 10 percent discount means paying 90 for 100 of assets, and if the discount narrows you gain on top of the holdings' own return. It can also widen, and often does in a panic.

These funds can borrow to invest, which lifts returns in good years and deepens losses in bad ones. The UK's investment trusts and Australia's listed investment companies are the classic examples; some have paid rising dividends for fifty years.

How it works

The fund lists once with a fixed number of shares; after that you buy and sell them on the exchange like any share.
The fund publishes the value of its holdings per share; the market price drifts around that number.
A board oversees the manager, who charges a yearly ongoing charge taken from the assets.
Many pay dividends from the income the holdings generate, sometimes smoothed from reserves.

The honest pros and cons

For

Buying at a discount means paying less than the holdings are worth.
The fixed share count lets the manager hold illiquid assets without forced selling.
Long dividend records at some of the oldest funds.

Against

Discounts can widen just when markets fall, adding a loss on top of a loss.
Borrowing inside the fund magnifies both directions.
Fees are often higher than an equivalent ETF.
Thinly traded funds have wide spreads.

Getting it in Australia

Listed investment company (LIC) available

Account type: Ordinary brokerage account (dividends come with franking credits for company tax already paid; half of a capital gain is taxable if the asset was held over 12 months)

Wherever you are

Compare the share price with the published net asset value; know whether you are paying a premium or getting a discount.
Check how much the fund borrows and what it charges.
Buy through your broker like a share, inside a tax shelter where possible.

Try it

Go deeper

Also called

investment trusts, listed investment companies (LICs), closed-end funds

Often confused with

Domestic shares: Part ownership of a company listed in your own country.
Stock index ETF: A fund traded on an exchange that copies a stock market index at low cost.
Mutual fund: A pool of many investors' money run by a manager who buys a basket of assets for a yearly fee.