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

Why have Australian living standards 'fallen' and how do we fix it?

For the last few years there has been much talk of a 'cost-of-living' crisis in Australia and of 'falling living standards'. Lately this has flared up again with the pickup in inflation resulting in a renewed fall in real wages.

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

Four options for an income investor’s next dollar

What if Australia’s golden age of dividends is ending? Rather than overhaul your portfolio, it may be worth considering where new capital can work harder. I discuss four income strategies and the trade-offs behind each.

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

The investment that sidesteps the new tax traps

Tax rules have changed, but many investors are still using yesterday’s strategies. Insurance bonds may offer advantages for those seeking greater control, tax efficiency and certainty about their wealth.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Latest Updates

Shares

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

Investment strategies

Making a case for the 40 year mortgage

The housing debate tends to focus on prices, interest rates and deposits. Yet an overlooked feature of the mortgage itself could help buyers enter the market sooner without abandoning prudent lending standards.

SMSF strategies

Red flags to watch out for when considering an SMSF

Thinking about an SMSF? Before you sign anything, learn how to spot the difference between genuine advice and a sales pitch, understand the real costs, and avoid the compliance mistakes that attract ATO attention.

Investment strategies

Not all income is created equal

Market conditions are shifting as familiar yield sources quietly lose momentum. Australian public credit may be the most compelling source of income in today's market but many investors haven't noticed the shift. 

Investment strategies

The market paid for change, not comfort

Reporting season has delivered a clear message: the market is no longer paying simply for quality, resilience or an earnings beat. It is paying for change in earnings expectations and the outlook ahead. 

Investment strategies

Will AI destroy investor capital?

Some of history's most important innovations changed the world while leaving investors much poorer. As trillions pour into AI, a familiar pattern may be emerging, one that rewards society far more generously than capital.

ASX reporting season: Signals, surprises, stock stories

August reporting season delivered strong earnings and bigger-than-expected dividends, but beneath this, a more nuanced story emerged. First Sentier Investors’ David Wilson and Christian Guerra unpack the key trends.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 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.