In LICs and LITs, did size always matter?

Claire Aitchison

Independent Investment Research

This month we continue our analysis of the relationship between a LIC/LIT's size, (measured by market capitalisation) and the discount/premium to net tangible assets/net asset value (which we refer to below as "discount"). We also take a look at all the market news in listed managed investments.

Last month, we showed there exists a fairly robust relationship between size and discount for LICs and LITs. The larger the LIC/LIT, the lower the discount, irrespective of the investment focus. However, if we wind back the clock to the previous three year period (2015-2018), we see that this relationship was much weaker. Our analysis suggests that the relationship between size and discount is stronger now than it was previously. 

So, what can account for the strengthening of the relationship between size and discount? We believe there are two factors that may explain the strengthening of the relationship. Firstly, the rise of exchange-traded funds has provided investors with increased options and those investors seeking more passive strategies have moved from LICs/LITs to ETFs, thereby eroding premiums (or deepening discounts) of some of the larger more index aware LICs/LITs. Secondly, investors, are demanding greater discounts for active management unless they have a proven track record. We note that the discounts for smaller LICs/LITs also reflects the lower liquidity of the securities.

To find out more details see the attached report.       

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1 contributor mentioned

Claire Aitchison
Head of Equities & Funds Research
Independent Investment Research
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