Discounts a plenty in the LICs market
The rather lackluster start to the year from both Australian Equities and Global Equities (in Australian dollars) has been met with an increased number of LICs (Listed Investment Companies) trading at discounts to their Net Tangible Assets backing. In fact 59 out of the 87 LICs trading on the ASX now trade at a discount, with 29 of them trading at a discount of more than 10 per cent.
It is not unusual for LICs to trade at a discount but on average the discount has widened since late last year. The number of LICs trading at more than 20 per cent discount has also increased from 6 to 12 over this period. There is no consistent pattern to explain why an LIC will trade at a premium or a discount to NTA. However, the larger and more long-standing funds tend to trade close to NTA.
While it can be readily understood why an LIC may trade at a premium to its fair value (“more buyers than sellers”), it’s less easy to understand why the reverse is possible. Typical causes include:
- Poor investment performance;
- Lack of investor awareness (weak sales and marketing activity);
- Lack of transparency regarding portfolio composition;
- Irrelevance of investment style (for prevailing market conditions).
- Assets might not trade on an exchange (direct property or private equity) so it is hard to value
While it might make good investment sense to buy a LIC when they are trading at a discount, there is often no mechanism apart from demand and supply and possibly buy-backs that will bring them closer together.
We have also noticed that there have been a few new LICs coming to market seeking to raise considerable assets. Given the current relative caution towards markets, one could wonder why you would do it now? Would it not make more sense to raise capital when assets are trading cheaply and there is a compelling investment opportunity?
Like any investment strategy we believe an important feature is the ability to hold cash.
Scott Phillips is the Head of Distribution of Montgomery Investment Management. To invest with Montgomery domestically and globally, click here to find out more.
Scott Phillips joined Montgomery Investment Management in 2013. Scott joined the firm from BlackRock Investment Management, where he was Managing Director, Head of Retail Australia for 12 years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
William
:
What are Montgomery Funds views on launching a LIC?
Roger Montgomery
:
Having launched a LIC myself, I can safely say it would have to be very large and the managers behind it would need to own the majority.
Chris
:
No discount with ARG or MLT, two of the better quality LICs in my own opinion, and have been waiting for one for a while now.
Carlos
:
Thanks Graeme, I should have said options at discount to share price, not listing price.
As for patiently waiting for NTA premium or discount to swing around, you could be waiting for many years if ever, and I’d rather put my money to better use in that time. The larger LIC s are very close to index funds and so are their returns. They may beat the index by 1 or 2%, but big deal. The smaller ones are often too small and low liquidity.
Graeme
:
Can’t agree with Carlos that options on listing have a strike price “at discount to listing price”. If the IPO is at $1, the option strike price will be $1. The price of the shares when first listed is invariably less than $1 (due to the NTA after expenses being less $1), so the option strike price is therefore at a premium. Don’t have a problem with this as it is all in the prospectus and can be considered. I have more of an ethical problem with LIC managers issuing more options and discounted shares a coupe of years down the track (more FUM = more fees?), especially after using the ‘closed end’ configuration as a marketing point. I used to have a problem with dilution, but after incorporating it into my spread sheet, I figured I had an advantage over those who didn’t consider it.
A couple of other things which are worth considering:-
1. Despite telling you otherwise, many are not active managers at all. Note how many held x million BHP shares when they were $40 and still held the same number when they’d fallen to $20.
2. The before tax NTA, which most mangers prefer to quote, may in many cases vary greatly from the post tax NTA.
3. There are also, of course, the huge often unfathomable swings in price to NTA ratio, though to my mind this adds to their attraction. Patience, and I’m talking years not months, is definitely required here.
Notwithstanding, I actually prefer LICs to unlisted funds and will only buy into the latter when a manger I like does not have a listed fund – hence why I am here!
Carlos
:
One important issue is the tendency of LIC s to give out lots of options on listing, usually at discount to listing price. Why would shareholders buy more shares when they can wait and convert their options at cheaper price. Keeps a lid on share price for sure.
Scott Phillips
:
Yes – a good point. Furthermore, investors need to be aware of any dilution effect caused by investors exercising these options.