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.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

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.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

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.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

Retirement

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".

Financial planning

How much does it really cost to raise a child?

With fertility rates at a record low, many say young people aren’t having kids because they’re too expensive. Turns out, it’s not that simple and there are likely other factors at play.

Exchange traded products

Passive ETF investors may be in for a rude shock

Passive ETFs have become wildly popular just as markets, especially the US, reach extreme valuations. For long-term investors, these ETFs make sense, though if you're investing in them to chase performance, look out below.

Shares

Bank reporting season scorecard November 2025

The Big Four banks shrugged off doomsayers with their recent results, posting low loan losses, solid margins, and rising dividends. It underscores their resilience, but lofty valuations mean it’s time to be selective. 

Investment strategies

The real winners from the AI rush

AI is booming, but like the 19th-century gold rush, the real profits may go to those supplying the tools and energy, not the companies at the centre of the rush.

Economy

Why economic forecasts are rarely right (but we still need them)

Economic experts, including the RBA, get plenty of forecasts wrong, but that doesn't make such forecasts worthless. The key isn't to predict perfectly – it's to understand the range of possibilities and plan accordingly.

Strategy

13 reflections on wealth and philanthropy

Wealth keeps growing, yet few ask “how much is enough?” or what their kids truly need. After 23 years in philanthropy, I’ve seen how unexamined wealth can limit impact, and why Australia needs a stronger giving culture.

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.