There are many "listed investment companies" (LICs) in Australia, which are similar to closed end funds in the US with the difference that they pay tax on their profits and then pay dividends with "imputation credits" attached for the tax paid, whereas US closed end funds do not pay tax and distribute capital gains and dividends in the same way that unlisted open end mutual funds do. Many of these LICs are rather small, but there are several fairly large "traditional LICs" that mainly invest in large cap stocks:
Argo Investments
Milton
Choiseul
Australian Foundation
Djerriwah
The interesting thing is that these large funds have very low expense ratios. Argo's expense ratio is 0.12%. Choiseul's is 0.11%, Milton 0.14%, Djerriwah 0.26%, and Australian Foundation 0.14%. By contrast, Vanguard charges 0.75% for its flagship Australian index managed fund for amounts under $50,000 and Colonial First State charges more than 1%.
Also they are pretty much buy and hold funds with very low turnover compared to traditional actively managed funds, which means they are tax efficient and they typically offer dividend reinvestment programs with new shares available at a discount.
During the bull market which ended in 2007 they outperformed the index. This was due to their preference for shares with high dividend yields, typically banks. Surprisingly, this has not overly impacted them since the start of the bear market. In the six months till June 30th 2008 the ASX 200 Accumulation Index lost 13.4%. Australian Foundation lost 11.5% and Argo 15.3%. Dejerriwah lost 13.9%. Moom lost 13.1% in Australian Dollar terms.
One issue is that these stocks typically trade at a premium to net asset value. For example, on 31 July, Argo's shares traded for $A6.72 while it's net tangible assets were $6.54.
I'm not in the market for these at the moment as I am fully invested in Australia so I'm not going to dig any deeper into this investment class. But you should certainly consider these stocks if you are interested in broad exposure to the Australian stock market.
2 comments:
I have also wondered this at times. One of my concerns about using these vehicles is the potential loss to CGT. If you do a bit of digging, the net tangible assets reduces significantly if capital gains are taxed. Nevertheless, the very low expense ratio appeals. To date, I've generally been using spdrs as the passive ASX tracking part of my portfolio (e.g. stw, expense ratio = 0.286%). But interested in looking further at these.
That applies the corporate tax rate of 30% to the profits if the portfolio was liquidated. So there is a significant embedded capital gain as you say which is also often the case in open ended funds. I don't know how that works actually for Australian ETFs.
If the LICs can pass on the capital gain as an LIC capital gain, you'll end up with a refund of tax on the distribution. In the 30% bracket you'll get back half of what they paid so the after tax number is likely an overestimate of the tax burden I think.
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