Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 366

International LICs can have a fully franked future

The international equity listed investment company (LIC) proposition is under siege, with almost all trading for extended periods at material discounts to their net tangible asset (NTA) values. The March 2020 market crash, subsequent evaporation of liquidity and widening of the discount has driven a further nail in the coffin, giving ammunition to critics who claim the LIC structure (and listed investment trusts, or LITs) is a negative in the value equation.

So where to from here? Undoubtedly, many fund managers will put their heads in the sand and ignore the problem. Others, running small sub-scale funds will use this as an opportunity to throw in the towel and liquidate or transition to complicated and untested structures.

Dividends in global and local stock markets

But there is another solution for the crème of the crop of international LICs that has the potential to transform the sector and enable it to flourish. This solution can be found in the structural advantages of the LIC as well as the insatiable demand from Australian investors for fully franked dividends.

Historically, most of these LICs have offered meagre and volatile yields, reflecting the generally low level of dividends paid by offshore companies and the erratic nature of realising net capital gains.

Conversely, Australian investors have prized stable, higher-yielding, fully franked dividends stocks above all else, focusing on Australian ‘blue chips’. However, with so many of these stocks now slashing dividends, investors recognise the need for alternative and more secure ways of generating fully franked dividends.

Bizarre as it may seem, it is possible to transform the way in which the ‘better’ international equity LICs operate, so that these vehicles become some of the most reliable fully franked dividend-yielding stocks. It may enable them to be used as a replacement for the blue chips that have disappointed.

Why are LICs well placed to pay stable dividends?

The only requirement for a LIC to pay dividends is to have sufficient liquidity, which is extremely unlikely to be a constraint for LICs that invest in liquid stocks and have no debt. This is unlike many other companies that are limited in their ability to pay dividends due to capital constraints, illiquidity or debt covenants such as banks, infrastructure and property vehicles.

However, many LIC managers are reluctant to commit to paying out consistent ongoing dividends as this reduces size, thereby negatively impacting their fees. This is compounded by a fear of being required to pay out dividends in periods where the LIC has suffered large negative return.

However, fund managers who not only provide strong returns to investors but also focus on capital preservation during market falls should be able to meet this commitment.

In order to pay fully franked dividends, a LIC must satisfy two tests.

Firstly, it must generate profits in a specific tax-paying period or alternatively to have profit reserves, to cover the dividend.

Secondly, it must pay sufficient tax from realising net capital gains.

It is impossible to guarantee having profits in a particular tax-paying period. However, some LICs have accumulated large profit reserves, enabling them to satisfy the first test over many years to come.

Obviously LICs cannot be guaranteed to satisfy the second test, but for fund managers who generally hold their positions over multiple years and invest in liquid stocks (that make it easy to recognise capital gains by trading in-and-out of) this should be relatively straightforward to achieve.

Global equities offer more opportunities

Finally, generating stable fully franked dividends is not sufficient, as managers must also deliver good long-term performance. This should not pose a huge problem in an international equity universe which is awash with a diverse range of opportunities.

There is a risk that proceeding down the path of stable, fully franked dividends could negatively impact fund manager fees and business models. However, we believe this is a risk worth taking, especially considering the long-term benefits of strong investor demand and retaining some of the benefits of the LIC structure.

Pengana International Equities Limited (PIA) recently 'relaunched' by changing its mandate to become the first international equities LIC to aim for stable fully franked dividends as well as good long-term returns. PIA has already built up profit reserves and is managing the portfolio to take additional profits when stocks hit our price targets. 

Local investors usually turn to Australian shares to generate franking credits, but an international fund can be run with the same aspiration. In an environment where investors are desperate for fully franked dividends, it remains to be seen which other global managers have the opportunity and inclination to follow.

 

Russel Pillemer is co-founder and Chief Executive Officer of Pengana Capital Group. This article is general information and does not consider the circumstances of any investor.

 


 

Leave a Comment:

RELATED ARTICLES

Why LIC discount harvesting is a buy-and-hold decision

LIC discounts widening with the market sell-off

How can the worst feature of LICs also be the best?

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 628 with weekend update

Australian investors have been pouring money into US stocks this year, just as they start to underperform the rest of the world. Is this a sign of things to come? This looks at 50 years of data to see what happens next.

  • 11 September 2025
Exchange traded products

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement

We need a better scheme to help superannuation victims

The Compensation Scheme of Last Resort fails families hit by First Guardian and Shield losses, as well as advisers who are being wrongly blamed for the saga. It’s time for a fair, faster, universal super levy solution.

Investment strategies

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Economy

How bread vs rice moulded history

Does a country's staple crop decide elements of its destiny? The second order effects of being a wheat or rice growing country could explain big differences in culture, societal norms and economic development.

Investment strategies

Small caps are catching fire - for good reason

Small caps just crashed the party like John McClane did in the movie, Die Hard - August delivered explosive gains. With valuations at historic lows, long-term investors could be set for a sequel worth watching.

Defensive growth for an age of deglobalisation, debt and disorder

Today’s new world order appears likely to lead to a lower return, higher risk investment environment. But this asset class looks especially well placed to survive, thrive, and deliver attractive returns to investors.

Economy

Will we choose a four-day working week?

The allure of a four-day week reflects a yearning for more balance in our lives. Yet the reliability of studies touting a lift in productivity is questionable and society may not be ready for such a shift anyway.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.