One of the unique differences of Listed Investment Companies (LICs) compared to Exchange Traded Funds (ETFs) is their ability to trade at a significant premium or discount to their Net Asset Values (NAVs), also known as Net Tangible Assets (NTAs).
As explained in our guide to ETFs & LICs, an example helps explain the concept of NAVs and how they can vary with LICs. Let’s take a LIC called XYZ company. Today it is trading for $0.80 per share, however the value of all the underlying investments is worth $1 per share. In this case the LIC is trading at a $0.20 discount to the value of its assets. On the flipside would be a LIC trading at $1.20 per share with underlying investments worth $1 per share. This would be trading at a $0.20 premium to its NAV.
Rationally you might think a LIC would always trade at a similar price to its NAV, but the share market is not always rational. Reasons for a LIC being priced differently to its NAV include a number of factors such as: general market sentiment, out/under performance of LIC compared to its peers, asset class the LIC is invested in and the liquidity of the share. ETF Watch tracks NAVs of all the LICs that we follow, as well a historic NAVs, which is a useful resource if you are interested in investing in LICs.
One of the unique pieces of information ETF Watch tracks is LIC NAVs over time. We display the last 5 years worth of NAV history as a proportion to the share price. For example, the chart on the right shows the NAV Premium or discount for popular LIC Argo. The blue area represents the premium or discount on a post tax basis, and the red area represents the premium or discount on a pre tax basis.
Back to the question, do LICs trade at a premium or discount to their NAV? To test this we’ve taken 16 LICs traded on the ASX. To make the list the LIC had to have:
We’ve given each of these 16 LICs equal weighting (ie, each one contributes 6.25% to the results regardless of their size. For simplicity we also used the pre-tax NAV, rather than the post tax, assuming that none of the funds are about to liquidate their entire holding tomorrow.
The LICs that made the list were:
|AFI - AFIC||ALR - Aberdeen Leaders|
|AMH - AMCIL||ARG - ARGO|
|ABW - Aurora Absolute Return Fund||AQF - Australian Governance Masters Index Funds|
|ALF - Australian Leaders Fund||AUI - Australian United Investment|
|BKI - BKI Investment Company||CIN - Carlton Investments|
|CYA - Century Australia||DJW - Djerriwarrh Investments|
|IBC - Ironbark Capital||MLT - Milton Corporation|
|WAA - WAM Active||WHF - Whitefield|
The above chart shows a two interesting insights:
I think the first point is simple to explain. LICs due to their closed ended nature mean their price is dictated by the price a buyer and seller are prepared to trade at. In times of market panic, sellers are willing (or forced) to sell at any cost, and buyers are thin on the ground. On the flipside, in times of exuberance, people will overpay. This can explain why the discount tends to get bigger when markets fall.
The reason why LICs have tended to trade very close to NAV or at a premium are harder to pinpoint, but I think can be explained by one or many of the following:
There’s a couple of learnings that I’ve taken out of this exercise.
Firstly, in times of market panic there may be opportunity with a contrarian approach to buy LICs and profit from their reversion back to their true NAV when markets recover.
Secondly, for over 2 years LICs have on general traded closer to their true Net Asset Value. If this trend continues expect the investment community to take more notice and see the sector continue to grow.
What are your thoughts?