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.

 

  •   15 July 2020
  •      
  •   

 

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

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

Latest Updates

Interviews

AFIC on the speculative ASX boom, opportunities, and LIC discounts

In an interview with Firstlinks, CEO Mark Freeman discusses how speculative ASX stocks have crushed blue chips this year, companies he likes now, and why he’s confident AFIC’s NTA discount will close.

Investment strategies

Solving the Australian equities conundrum

The ASX's performance this year has again highlighted a persistent riddle facing investors – how to approach an index reliant on a few sectors and handful of stocks. Here are some ideas on how to build a durable portfolio.

Retirement

Regulators warn super funds to lift retirement focus

Despite three years under the retirement income covenant, regulators warn a growing gap between leading and lagging super funds, driven by poor member insights and patchy outcomes measurement.

Shares

Australian equities: a tale of two markets

The ASX seems a market split in two: between the haves and have nots; or those with growth and momentum and those without. In this environment, opportunity favours those willing to look beyond the obvious.

Investment strategies

Dotcom on steroids Part II

OpenAI’s business model isn't sustainable in the long run. If markets catch on, the company could face higher borrowing costs, or worse, and that would have major spillover effects.

Investment strategies

AI’s debt binge draws European telco parallels

‘Hyperscalers’ including Google, Meta and Microsoft are fuelling an unprecedented surge in equity and debt issuance to bankroll massive AI-driven capital expenditure. History shows this isn't without risk.

Investment strategies

Leveraged single stock ETFs don't work as advertised

Leveraged ETFs seek to deliver some multiple of an underlying index or reference asset’s return over a day. Yet, they aren’t even delivering the target return on an average day as they’re meant to do.

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.