Does size matter?

Claire Aitchison

Independent Investment Research

This month we take a look at the LIC/LIT sector focusing on the relationship between the vehicles' size, as measured by comparing market capitalisation against the share price discount or premium to net tangible assets.

Looking at the entire LIC/LIT universe, there seems to be quite a strong relationship between size and discount. The larger the LIC/LIT, the lower the discount, regardless of the investment universe. This is unsurprising, as overall the larger vehicles mainly follow diversified and index-hugging strategies, in addition to typically providing greater liquidity. We would expect discounts to be narrower than in smaller LICs/LITs, which often employ more active strategies that are less index aware and thus riskier.

In the attached report we look at the size versus discount relationship across the LIC/LIT sectors. The takeaway from the analysis is that when looking at discounts or premiums to NTA, size does matter as a general rule. This is more so for LICS/LITs with long-only equity strategies. 

But size may merely be a proxy of perceived risk, and investors are more attracted to LICs/LITs that follow lower risk/more passive strategies, such as investing in yield generating securities that are very liquid. What was highlighted in the analysis is that investor confidence in a manager is a key mitigating factor in this discount-to-size relationship; to the extent that such LICs can trade at significant premiums to NTA regardless of their size.

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The views here are not recommendations and should not be considered as investment advice.

Claire Aitchison
Head of Equities & Funds Research
Independent Investment Research
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