Joint Statement by Baillieu Limited Chairperson David Trude and Managing Director Gavin Powell

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MF, LIC, ETF, ETMG, LIT? Let’s walk through the menu of alphabet soup

Anyone for a LIC with a little ETF on the side, and a touch of MF for old time’s sake, and while we’re at it why not throw in a peppering of LIT and ETMF?

If you’re slightly confused by the alphabet soup of investment structure acronyms that are shaken and stirred about investment circles these days, then you’re definitely not alone.

What they all have in common is that they offer a diversified basket of investments – either as units or shares – through a single vehicle.

We’re here to walk you through this menu in a digestible way. We’ll explain the key ingredients of each structure and how it might benefit your investment portfolio palette.

Let’s start by reflecting on the difference between indexed versus active investment strategies.


An indexed investment strategy will track a specific market or sector index, gaining exposure across all the underlying securities that make up that index. The value of the investment will move roughly in line with that index.

For example, if a fund or company replicates the All Ordinaries Index, its portfolio will be made up of the constituents of the index proportionally in line with their requisite weighting in the All Ords. So (all else being equal) when the All Ords rises by 5%, the vehicle will also increase by 5%, or if the index drops 5%, then the vehicle will take a similar tumble.

The benefits of index funds include that they are highly diversified, relatively straightforward, and have low operation costs because the investment mix is determined by the index.


An active strategy is one where there’s a portfolio manager doing research and making judgements about which assets to buy and sell. These decisions will be based on a specific investment approach or mandate, such as to minimise the impact of market volatility, or to outperform a specified index, or to seek growth opportunities in a specified sector.

With these definitions in place, let’s move on to our alphabet soup.

If you’re slightly confused by the alphabet soup of investment structure acronyms that are shaken and stirred about investment circles these days, then you’re definitely not alone.

Managed Funds (MFs)

MFs are an investment structure that have been around for decades, but you might not have recognised them in their newly-styled acronym form.

They can be listed (these are covered later on under ETMFs) or unlisted, open-ended unit trusts that invest in a portfolio of assets. They may have either index or active strategies, and may focus on specific sectors or markets. There is usually no limit on the daily acquisition in-flows and redemption out-flows to the fund.

When you invest in a MF, you acquire a number of units (based on the unit price and the dollar value of your investment on the day of acquisition), and this represents your holding of the fund. Unlike direct investments you don’t own the underlying assets, you own units in a trust that holds the assets. You can usually redeem your investment at any time, and the cash you’ll receive will reflect the Net Asset Value of the fund, with your payout calculated on the unit price times the number of units you hold.

Trusts do not pay tax, but instead distribute all earnings and capital gains to individual unit holders. The distribution is classed as trust income and any franking credits of underlying assets are passed along to each unit holder, who will add the income received from the MFs profits to be assessed at their individual tax rate.

Examples of MFs include Pengana Emerging Companies Fund and Pimco Australian Bond Fund.


Listed Investment Companies (LICs)

LICs are similar to MFs in that they invest in a portfolio of assets based on a particular sector and may have either an index or active strategy, but they differ significantly in that they can be bought and sold on the Australian Securities Exchange (ASX). The other key difference is they are closed-ended, which means there’s a fixed number of shares so they can only be bought when someone is selling (though, like other listed companies, they can increase number of shares through capital raisings and other share issues or decrease through buy-backs).

The price of LICs will be dictated by the demand and supply in the market rather than the Net Asset Value. It’s not unusual for the price of a LIC to trade at a premium or discount to the Net Asset Value.

Because LICs are a company rather than a trust, their board decides whether or not it will pay dividends. This decision will usually be based on the performance of the LIC in the preceding period, and the retained profits balance and franking credits balance of the company. The LICs pay company tax on their profits, and for this reason LIC dividends paid out to shareholders will generally have franking credits attached.

Examples of LICs include Australian Foundation Investment Company (AFIC) and Templeton Global Growth (TGG).


Exchange Traded Funds (ETFs)

With the above explanations in place, we’re ready to introduce the Exchange Traded Funds or ETFs.

These relatively new structures have been available in Australia since 2001 and have very quickly taken off in our market because they offer diversification and simplicity.

Like LICs, they are exchanged on the Australian Securities Exchange, however they differ in that they are open-ended unit trusts like MFs, so they have unlimited in-flows and out-flows. Every ETF has a dedicated “market maker” who can add or withdraw from the supply of ETF units by trading directly with the ETF issuer. So, if demand in a particular ETF outweighs supply of that ETF on the market that day, then the “market makers” will simply make more units of that ETF available.

ETFs are generally indexed and a broad range of them exist on the ASX, including vehicles that track Australian or international shares indexes, foreign currencies, precious metals, and fixed income products.

Unlike LICs, ETFs usually trade very close to their Net Asset Value. Like MFs, all earnings and capital gains must be distributed to unit holders.

Examples of ETFs include iShares S&P500 ETF (IVV), and Vanguard Australian Shares High Yield ETF (VHY).


Exchange Traded Managed Funds (ETMFs)

So this next item on the menu might sound complicated as we move into a four-letter acronym, but they are basically just ETFs that have an actively managed strategy, rather than following an index.

Examples include Magellan Global Equities Fund and K2 Global Equities Fund.


Listed Investment Trusts (LITs)

LITs are the newest of these structures and are essentially a combination of an LIC and an ETF. They are closed-ended, so only have a fixed number of units available, and these units are traded between unit holders on the ASX.

Because they are a trust and not a company, they distribute all their income in the same way as MFs, and are also taxed in the same way.

Examples include MCP Master Income Trust (MXT) and Magellan Global Trust (MGG).


What are the benefits of these structures?

All of these alphabet soup structures give you exposure to a diverse set of underlying assets through a single holding, which brings a range of benefits.

Firstly, they can be a great entry point for investors who are just starting out or who have low balances to invest, because they make it possible to have a broad, diversified portfolio at a relatively low cost.

Third, they are simple to administer and there’s much less paperwork involved in owning one of these structures, rather than a portfolio of multiple shares.


Enjoy your meal

Now that we’ve stepped you through the various ingredients that make up alphabet soup, we’ll leave you to consider the menu.

When weighing up your options, remember to assess the cost (particularly management fees) and tax implications of each structure, and keep an eye out for those Net Asset Value discounts and premiums (for LICs, ETFs and ETMFs).

We hope you enjoy your meal and we’re always happy to speak with you individually about our recommendations… or even the chef’s specials.

This information is a statement of personal opinion only and is not intended to constitute general or personal advice to any person or entity.

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