In its latest LMI Monthly Update Independent Investment Research discusses why LICs trade at a discount to NTA and highlights 13 LICs trading a discount of more than 5% to pre-tax NTA. It discusses some of the reasons LICs trade at a discount and looks at some potential catalysts for discounts to narrow. The report also takes a closer look at an international focused LIC trading at a discount, despite its proven investment strategy.
13 LIC's trading at a discount
We have written a number of times about why LICs trade at premiums and discounts to NTA and believe there are many factors that can explain why LIC/LIT share prices diverge from pre-tax NTA.
These include, but are not limited to:
- portfolio performance;
- portfolio size (many subscale LICs/LITs trade at discounts);
- marketing and communication efforts by the manager;
- investor preferences;
- overall share market sentiment; and
- relative interest rate and yield differentials with competing investment opportunities.
Discounts and premiums can change over time, so in our report we compare current discounts/premiums against three averages. It is important to remember that some LICs/LITs may always trade at a discount for a variety of reasons including ongoing underperformance and subscale issues.
In the report we show all LICs/LITs in our coverage with a discount greater than 5% and also compare the April discount with the three-year average. There are no LITs, only LICs on the list. There are two things that stood out .
Firstly, the LICs with the six largest discounts all have market capitalisations under $100m. In our view, it is difficult for small scale LICs to generate the same level of interest as larger LICs and they are likely to have poor market liquidity. Our tables on the following pages show that many of the LICs with low market caps have large discounts.
Secondly, four of the LICs have options on issue. We have found that unexercised options can be a drag on LIC share prices until after the options are exercised. The reason for this is that options may be dilutive, as there is the possibility they may be exercised at a price lower than NTA. Before investing in LICs with outstanding options it is a good idea to calculate the diluted NTA.
I enjoy your writing Peter. Quick question: with a sub $100M LIC trading at a significant discount, what is stopping someone from buying out all outstanding shares and then liquidating the LIC at a profit?
I've asked the following before with regard to IIR reports but do not appear to have received an answer. Does 'Not Rated' mean the LIC/LIT has never been looked at? If so, what happened to the funds that were looked at and not recommended? I would be surprised if all those looked at were deemed recommended or better. Or does 'Not Rated' also include those funds that have been looked at and not recommended? In which case could a notation be added to the IIR Rated column to distinguish which of these possibilities (ie. not looked at or not recommended) applies.
Hi Graeme, Thanks for you comment/question. I did submit a response to this question last time, albeit with a delay over the Christmas/New Year holiday. So, I'm sorry if you did not see this response. My comments were as follows: "The entities that are noted as “Not Rated” in our Monthly LMI Update are those entities that do not participate in our LIC research scheme but for which we simply provide base information. Importantly we do not have a view on these LICs and therefore there is no rating ascribed. Our LIC research rating scheme applies to those managers who participate in our quarterly rating process. For these participants we collect detailed data on a quarterly basis which underpins their rating. Where it is likely that we may rate an entity as Not Recommended, the Manager has the right to not go ahead with publication and to not participate in our research scheme. In such instances we notify ASIC. These entities will also appear in our tables as Not Rated." For you information, we have also introduced a new rating "Investment Grade" for entities that might not meet our requirements for a Recommended rating but we still consider worthy as an investment.. This hasn't been used yet but gives us an additional rating option. I hope the above helps. Peter
Hi Chez, Thanks for your question. A subscale LIC trading at a large discount could most certainly be a target for a takeover and liquidation scenario. If the LIC is externally managed, liquidation might require co-operation of the manager, depending on management agreement arrangements. We have seen activists move in on underperforming and discounted LICs in the past. Regards Peter
Thanks Peter. Usually if a comment isn't responded to within a few days, it never is. I probably didn't even consider holidays, being long past the stage of them having any relevance to me!