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A look at the history of LIC Net Asset Values

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).

By ETF Watch - Nov 30, 2015

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).

What are NAVs and what do they mean?

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.

Do LICS normally trade at a premium of discount to NAV?

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:

  • At least 5 years worth of history
  • Market cap of at least $30m
  • Reasonable liquidity
  • A focus on ASX equities, either large caps, or the whole index.
What is all this pre/post tax business?
LICs are required to report their NAV on at least a monthly basis on both a pre & post tax basis.  The pre tax NAV is how much the assets could be sold for on the day of reporting if the whole investment was to be liquidated. The post tax number is simply the net proceeds after capital gains tax is paid on the liquidated assets.  In the Argo example above, there’s a large discrepancy between the Pre/Post tax premium or discount due to Argo’s nature as being a buy and hold manager and the time they’ve been around. Argo are probably holding Westpac, CBA and BHP shares that they bought for just a few dollars each, so the tax on selling their whole portfolio would be huge. Other LICs that turn over their portfolios more often or do not have the same history tend to trade at a tighter spread.

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
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 results

The above chart shows a two interesting insights:

  • The discount tends to follow market movements, with a tighter discount when markets are rising and a larger discount when markets are falling.
  • In mid 2013 LICs were re-priced to trade much closer to their NAV, previously trading at discounts.

What is the reason for the above facts?

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:

  • In continuing low interest rate environments yield seeking investors are bidding up the price of LICs due to their generally high yields.
  • The FoFA reforms which came into effect in July 2013 and banned commissions being paid to financial advisers by product manufactures have reduced the appeal of managed funds, resulting more advisers recommending LICs and thus adding to demand for a reasonably limited supply of LICs.
  • The buzz around ETFs which has grown over the last couple of years has also rubbed off onto their older cousin, the LIC.

What are the learnings?

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?

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Where did you obtain historical data on the LIC net asset values?

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