[Editor’s Note: Do not read this article as a recommendation to invest in Listed Investment Companies. Like all investments, LICs have risks. Do further research of your own or talk to a licensed financial adviser before acting on themes in this article. The ASX website has information on LICs and Listed Investment Trusts (LITs), including their features, benefits and risks. For the purposes of this article, references to LICs also includes LITs].
ASX Investor Update: Angus, what are listed investment company premiums and discounts?
Angus Gluskie: Listed investment companies (LICs) are closed-end investment funds listed on ASX that seek to offer investors the ability to invest in a diversified portfolio of underlying investments, such as shares.
LIC shares may be bought and sold on the ASX's market at a price agreed on between buyers and sellers, the same as other ASX listed shares. Settlement of the trade takes place two business days after the date the order traded on the market – this is known as T+2.
Because the share price is determined by buyers and sellers in the market, it may be higher, lower or the same as the underlying value per share of the LIC’s investment portfolio (referred to as the LIC’s Net Tangible Assets (NTA)).
Angus Gluskie, MD, Whitefield Industrials Ltd
An LIC is said to be trading at a “premium” when its share price is higher than its underlying NTA and is said to be trading at a “discount” when its share price is trading on ASX lower than its underlying NTA.
ASX: What determines LIC premiums and discounts?
AG: There are a number of factors that may cause a LIC to trade at a premium or discount to its NTA.
One such reason may be the volume of buyers or sellers in the market. If there are more sellers than buyers in the market, then prices could tend to trade at a discount to NTA. Alternatively, if there are more buyers than sellers in the market, prices may be pushed higher.
The investor demand to buy or sell a LIC’s shares could be influenced by a number of factors including, but not limited to:
- short-term falls in domestic or global equity markets and overall equity market volatility
- the performance of its investment portfolio
- its history of fully franked dividend payments
- its marketing and communication strategy
- the overall experience of its investment management team and board of directors.
ASX: Do premiums and discounts create an added opportunity or risk for an investor?
AG: When an investor buys shares in a LIC they are buying exposure to a portfolio of underlying securities that are typically being actively managed by the investment manager. Examples of the types of underlying securities that may be in a LIC include Australian shares, international shares or fixed income securities. Therefore, like any investment into an investment fund, investors need to take into account the risks associated with these securities and the ability of the investment manager to achieve their investment objectives as stated in the prospectus or product disclosure statement.
In addition, the ability for a LIC’s share price to fluctuate around its NTA creates both opportunities and risks for investors.
In Whitefield’s view, the opportunity to acquire an LIC share when it is trading below its NTA can potentially create an opportunity for a long-term investor if the share price increases and starts trading closer to the LICs NTA. Conversely, buying shares in a LIC that is trading at a premium to the NTA may create additional risks for the investor to consider if the share price starts declining and trades closer to the NTA of the LIC.
ASX: How can investors navigate premiums and discounts?
AG: Similar to investing in any other ASX share, investors in LICs may use common strategies to harness the benefits and control the risks of market pricing.
The table below, from Whitefield, summarises its views on using LICs.
| How investors can navigate closed-end LIC pricing | |
|---|---|
| Buy, hold and sell reasonably and sensibly | Buy at fair or reasonable prices or better. When selling, do so carefully, patiently and sensibly. |
| Average out variations over time by dollar cost averaging. | Consider using a dollar-cost averaging strategy. When investors purchase securities over time at regular intervals, they may decrease the risk of paying too much before market prices drop. It also helps spread the cost out over time. |
| Long-term investing | In Whitefield’s view, a preparedness and ability to invest for the long term reduces the likelihood that the investor may have to sell at a disadvantageous time, while potentially maximising the time over which they may benefit by buying advantageously. |
Source: Whitefield
ASX: Where can investors get information on discounts/premiums?
AG: LICs make a formal release of their technical NTA (and share price) within 14 days of month-end. This release provides a guide to whether the stock has been trading at a premium or discount at the last month-end. This monthly release can be obtained from ASX Company Announcements or from the LIC’s own website.
An increasing number of LICs produce and release weekly NTA estimates. Some stockbroking and research groups may also produce estimates of weekly NTA premiums and discounts.
ASX: Is the LIC structure primarily designed for long-term investors?
AG: in Whitefield’s view, because the opportunities and risks associated with premiums and discounts can be respectively harnessed and controlled most constructively through long-term investing, investment in LICs has typically been suited to longer time-horizon investors.
DISCLAIMER
Information contained in the article represents the opinions of the author and is provided for educational purposes only. It is neither advice nor a recommendation. Investors should consider their own financial circumstances and objectives, obtain all relevant information on an investment and may wish to obtain professional financial advice prior to forming their investment decisions.
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