Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 183

Understanding LIC fee structures

Nearly 60% of the Listed Investment Companies (LICs) in our coverage have delivered strong benchmark outperformance over the past decade, and LICs still look compelling as part of an investment portfolio.

Fees are part and parcel of any investment vehicle, including LICs, and can significantly affect real value, so they are always important. This article examines the costs associated with LICs and why some managers have higher fee structures than the average.

Types of fees

Fees and expenses generally take three forms:

  • management fees
  • administration fees
  • performance fees.

Management fees seek to recover general day-to-day expenditure of the investment process. Traditionally, management fees range between 0%-2% of total cost, within the LICs in our coverage. Administration fees incorporate all other expenses incurred in the fund’s management such as director’s fees, rent, audit, and legal. These fees are charged regardless of performance and may vary considerably depending on the fund manager’s investment mandate, style and approach.

Performance fees seek to directly align the profitability of the manager and the performance of the underlying fund. A performance fee is best described as a reward for performing above the fund’s stated benchmark. Typically, performance fees range between 10%-20% of the value above the benchmark, and as an investor you need to consider the performance fee’s structure and whether you think it’s fair and aligns the interests between the portfolio manager and investor.

While lower fees do not guarantee superior performance, they are less of an impediment on returns. In fact, many of the higher fee mandates operate in less-efficient sections of the market and often outperform the market, i.e. smaller caps mandate LICs.

Indirect Cost Ratio = Indirect Cost/Average Pre-Tax NTA

The Indirect Cost Ratio (ICR) is the aggregation of indirect costs divided by the average pre-tax net tangible asset for the year and presented as a percentage. Indirect costs generally include management fees, performance fees, legal, accounting, auditing and other operational and compliance costs. Throughout our coverage, we produce both the ICRs with and without performance fees.

Comparing fee structures

Our analysis of the LICs in our coverage alludes to some interesting facts.

First, certain strategies are more cost-intensive to execute than others. This could be due to the heavy resourcing required to effectively implement a mandate (international assets), a lack of research coverage in an underlying market (small caps) or sophisticated investment strategies (long/short infrastructure assets).

Second, the specialised nature of these strategies in less efficient parts of the market may give the managers the consistent ability to outperform the market or deliver an effective risk-weighted return. However, you need to clearly evaluate this in the context of the offering.


Click to enlarge

Putting this into perspective, the average performance (pre-tax NTA) of large-cap focussed LICs in our universe is 10.1% over five years and 4.9% over 10 years, large to medium cap LICs is 11.6% and 5.9% respectively, while medium to small is 10.3% and 8.4%. Small to Micro LICs is 6.4% and 3.8%, Long Short/Market Neutral is 8.9% and 8.7%, International is 15.7% and 3.4%. However, there is not sufficient data for specialist LICs over those periods.

Overlaying this with average Indirect Cost Ratio, you will note the different fee structures across each mandate:


Click to enlarge

Broadly speaking, there are seven LICs with an ICR of below 0.20% These are a viable option if cost is a major factor in deciding to invest in a LIC. This ICR is materially lower than most industry funds, retail funds, index funds and exchange traded funds (ETFs) listed on the ASX.

However, if investors focus purely on cost, they would neglect some of the better performing LICs, particularly on a risk-adjusted basis. The graph below reflects the risk return of each LIC over the past five years. The vertical axis highlights the standard deviation of the investment performance, while the horizontal axis displays the LIC’s pre-tax NTA performance (investment performance).


Click to enlarge

On a five-year risk adjusted perspective, the best performing domestic LICs are WAM Capital (ASX:WAM) and WAM Research (ASX:WAX). These funds outperform all other vehicles by a material margin while offering a lower risk profile. The Magellan Flagship Fund (ASX:MFF) was the best-performing international LIC. We attribute these strong performances to a more cost-intensive mandate and performance fee structure that some of these LICs apply.

Conclusion

Fees clearly weigh on performances, and an excessive fee structure will make it increasingly difficult for a manager to outperform their benchmark. However, investors also need to consider whether the fee structure is appropriate. It is the manager’s ability to consistently deliver an effective, risk-adjusted return after fees and taxes, that counts in the long run.

 

Nathan Umapathy is Research Analyst at Bell Potter Securities. This article has been prepared without consideration of any specific person's investment objectives, financial situation or needs and there is no responsibility to inform of any matter that subsequently may affect any of the information. For the latest Bell Potter Quarterly Report and NTA updates, click here.

 

  •   24 November 2016
  • 4
  •      
  •   

RELATED ARTICLES

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

Managing LIC discounts and premiums

What is happening with LIC dividends?

banner

Most viewed in recent weeks

The ultimate superannuation EOFY checklist 2026

Here is a checklist of 28 important issues you should address before June 30 to ensure your SMSF or other super fund is in order and that you are making the most of the strategies available.

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

Lithium's rally is real this time – but no-one trusts it

The lithium rally mirrors the early-2010s tech stock surge, with demand set to double by 2030. Supply has been slow to respond, creating a market deficit for future tech like humanoid robotics and solid-state batteries.

Welcome to Firstlinks Edition 662 with weekend update

The debate over the budget is increasingly shaped by frustration and perceptions of unfairness, rather than clear-eyed assessment of policy outcomes.

Two months into retirement

A retirement researcher's take on retirement and her focus on each of her six resource buckets to stay engaged during the transition and beyond.

Latest Updates

Are the government’s CGT changes better for young investors?

New CGT rules promise fairness, but could young investors lose out? A practical scenario reveals how changes impact deposit goals, investment choices, and long-term wealth building for the next generation.

Retirement

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

Investment strategies

AI can’t pick winning funds, but it can help you avoid losers

Machine learning has been touted a game changer investment management. But a new study overturns claims that AI can generate positive alpha in mutual funds. Here are some practical takeaways for investors.

Investment strategies

Inflation BIG picture: Boomers got lucky, next Gen not so much

A 150-year view shows inflation's upward bias, driven by shifting monetary regimes and war stocks. This marks an end to the low-inflation boom that enriched boomers and ushers in a higher-inflation era for younger investors.

Planning

Tax deductibility of financial advice improves affordability

A shrinking adviser workforce and rising costs are squeezing access to financial advice, just as demand surges. Expanded tax deductibility offers a modest but meaningful boost to affordability.

Retirement

Retirement in reality – 3 months in

A reflection on travel mishaps, smart decision-making, time pressures and rebuilding health habits. Three months in, here's how to navigate the surprising realities of life after work.

Taxation

Calculating the business cost of Australia’s new 'productivity tax'

Amid a national productivity crisis, new economic analysis finds the tax changes in the 2026 Federal Budget create Australia’s first-ever by design 'Productivity Tax', where young people will pay the biggest price.

Sponsors

Alliances

© 2026 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.