Share Investments

There are two types of companies; listed, and unlisted. A listed company allows investors to purchase increments of shares within that company. When shares are purchased, the shareholder effectively becomes a part-owner of the company on the stock exchange. This paper looks at the various ways that investors can obtain shares in listed companies.

There are thousands of listed companies across global stock exchanges that investors can choose to invest in. Good investment strategies include a diversified portfolio of shares. For most, it’s not possible to gain exposure to shares in all listed companies as some share prices sell for over $1,000/share.

So what options do we have?

  1.     Buying Individual Shares

You can buy individual shares through a stockbroker, or directly.

To purchase shares you need to have a broking account. You then select the companies you wish to invest in. You can either conduct personal research, or consult your financial adviser.

Following share acquisition, be prepared to put in time and effort to track the performance of your investment. Watch the market closely to ensure you make informed buy/sell decisions.

It’s easier to buy domestic shares rather than shares listed offshore. To invest in offshore markets you require a foreign brokerage account and usually an offshore custodian. However, there are benefits. For more detail regarding investing in shares in global markets, refer to our Global Share’s paper.

Pooled Investments

The alternatives outlined below pool investors’ money to provide boarder market exposure.

Pooled investments are run by dedicated investment professionals. Some pool investments operate across a range of asset classes. However, we will focus on the vehicles available for share pooled investments.

  1.     Listed Investment Companies (LIC’s)

LIC’s are investment companies listed on stock exchanges. They use money from investors to purchase shares in a range of listed companies. LIC’s pay dividends from their earnings to shareholders like shares in listed companies, and it is fair expect that the LIC’s share price will increase in value over time.

LIC’s take an active approach to stock selection and have a diversified portfolio’s of investments.

LIC’s have been in existence in Australia since before the Great Depression. Generally, they have lower ongoing costs than unlisted managed funds.

LIC’s share prices fluctuate with market movements. The share price may not reflect the exact value of the underlying investments. Most LIC’s only publish the top 20-25 holdings and Net Tangible Assets (NTA) on a monthly basis.

LIC’s often trade at a discount or premium to their fair value, or NTA. For example, if an LIC holds assets worth $1 per share, it trades at 90 cents. In theory, this represents a good buying opportunity for investors hoping to make some gains in this gap between market and asset valuations.

However, there can be a hidden downside whereby the LIC is trading at a discount for good reason. There is always a risk that the discount may continue, or even worsen. When we advise our clients on investing in LIC’s, we research the quality of the underlying investments carefully. We then model the last known NTA against market movements to form a view of the relative premium versus the discount at that time. When we believe that the investment quality is strong, and the LIC is trading at a discount, we work with our clients to take advantage of that arbitrage.

  1.     Exchange Traded Fund (ETF)

ETF’s pool money from investors’ and invest those funds in a range of companies like an LIC. Unlike LIC’s, ETF’s don’t suffer the same issues around premium/discount arbitrages.

Like LIC’s and unlisted managed funds, ETF’s allow you to diversify your portfolio without having large amount of funds to invest. You can buy or sell ETF’s like any other share. Like owning shares with companies directly, ETF’s pay dividends from their earnings and it is fair to expect their share price increase in value over time.

They generally have lower ongoing costs than managed funds. However, due to stock broking fees on each contribution, they are less suitable for investing small amounts regularly.

ETF’s offer full transparency and publish a full list of their holdings and NTA daily. Transparency of NTA’s allows for greater price tension around the NTA value because institutional market participants move in and take advantage of the arbitrage.

Institutional market participants, known as Authorised Participants (AP), can create ETF units in order to take advantage of arbitrage premiums, or discounts to the NTA.

AP’s can create new ETF units by providing shares, or cash, that can be exchanged for ETF shares. These shares can be sold to a secondary market of individual investors. Conversely, AP’s can redeem ETF shares in large increments in exchange for the underlying shares or cash.

The purpose of these transactions is to maintain price tension around the funds NTA. Therefore, purchasers of ETF shares on the stock exchange are transacting at roughly the NTA.

When we recommend ETF’s to our clients, we review the ETF within the context of the firm that manages the fund, and its investment strategy. Typically, ETF’s in Australia use an index investment strategy and are not leveraged. That means that the fund buys shares in the same proportion represented by an index (e.g. S&P/ASX), and only employs investors funds (i.e. there are no borrowings).

The illustration below shows the comparison between the S&P/ASX 50 index, and the holdings of a popular ETF:

Untitled

Note that; while this is the case in an Australian context, some ETF’s in offshore markets purchase shares using leverage

4. Unlisted Managed Funds

Unlisted managed funds are pooled investments that include shares and are not listed on a stock exchange. In an unlisted managed fund, the fund manager guarantees to buy or sell the units of the fund at the relevant NTA. There are limitations, but the basic benefit is that you get what you pay for.

Like LIC’s and ETF’s, unlisted managed funds are professionally managed. They allow investors to purchase a diversified portfolio of shares without having a large amount of money to invest.

To invest, or withdraw in an unlisted managed fund, all you need to do is complete the relevant form and the investment manager will act on your request based on the terms set out in the disclosure document.

While the underlying assets of an unlisted fund may be similar to those of an LIC, or an ETF, typically their fee structure is higher than buying individuals share, ETF’s or LIC’s.

The higher levels of fees are in part attributed to higher levels of access and services. The higher levels of access mean that many unlisted managed funds will accept lower initial contributions than would otherwise be accepted.

Unlisted managed funds generally allow regular contribution. You can choose small monthly or weekly amounts, or transfer payments when it suits. This strategy, often known as dollar cost averaging, is a very successful investment strategy.

Summary of difference

Like all investments, share investments attract a range of risks. The table below relates to the investment vehicles that we have explored. Before investing in any asset class, you should consider the associated risks regardless of the investment vehicle.

Summary of difference

Like all investments, share investments attract a range of risks. The table below relates to the investment vehicles that we have explored. Before investing in any asset class, you should consider the associated risks regardless of the investment vehicle.

SharesLIC’sETF’sManaged Funds
Risk DiversificationLow – exposure to individual companyHigh – exposure to a diversified portfolioHigh – exposure to entire indexVaries depending on the fund
Expenses & FeesBrokerage costs;  buy/sell spreadsBrokerage costs; low management feesBrokerage costs; low management fees; buy/sell spreadsBuy/sell spreads; higher management fees
PricingReal time, intra-dayReal time, intra-dayReal time, intra-dayVaries from end of day to weekly or even monthly
LiquidityDependent shares on issue and market supply and demandDependent shares on issue and market supply and demandHighVaries significantly from high to limited liquidity in closed end structures
Market Price v. NTAPrice may trade at premium or discount to NTAPrice may trade at premium or discount to NTAGenerally no significant and sustainable divergenceNTA subject to entry, exit and management charges
AccessibilityPurchased on market or via Initial Public Offer (IPO) or placementPurchased like a sharePurchased like a shareEntry via manager or intermediary (platform or advisor) – generally high administration burden
Transparency of underlying portfolioTransparentTop 20 portfolio constituents available each month, more details in annual accounts. Can be time opaquePortfolio constituents available at all timeOn request, rarely daily. Can be time opaque

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This information provided is general in nature and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstancesAll financial product advice including superannuation, retirement planning, investment, margin lending and life insurance is provided by representatives of Shartru Wealth Pty Ltd AFSL number 422409