One of the considerations for investors with listed investment companies (LICs) is that they often trade at a discount or premium to their net tangible asset backing (NTA). That is, the shares change hands in the secondary market on the ASX at a price, which is very different to their theoretical value.
Because LICs typically invest in listed assets, mainly shares in other companies, the theoretical value can be very precisely determined. In effect, it is calculated by assuming that the LIC is wound up and that the assets are sold at market value, with the proceeds distributed back to the shareholders on a per share basis. Tax impacts are generally excluded.
If a LIC is trading at a premium, then the shares on the ASX are changing hands at a price above their theoretical value, which means that a buyer on the ASX is paying more for the shares than they are actually worth. Conversely, the seller is receiving more. If the shares in the LIC are trading on the ASX at a price, which is less than their theoretical value, then the LIC is trading at a discount.
LICs can trade at a premium or discount for some time, as shown below by the following chart from Australian Foundation Investment Company (AFI), the largest LIC by market capitalization on the ASX. This shows the premium or discount in % over the last decade.
A number of factors influence the discount or premium, including market cycle, market perception of the investment manager and the simple supply and demand laws (i.e. more sellers than buyers in the secondary market). Although there are no absolute rules, LICs with better performance records and which over time become bigger will tend to trade more often at a premium (or smaller discount), while those where the performance has been varied will tend to trade at a discount.
LICs are required under ASX rules to publish their NTA at the end of every month, so it is relatively easy to keep track of the discount or premium. For comparison purposes, we use the NTA before tax measure (there is also an after tax NTA published, which takes into account tax that the company would pay if all assets were sold).
Listed below are the major LICs that have broad equity market exposure, their actual NTA and discount/premium at 30 June, and an estimate for last Friday (15 July). With the market rallying strongly in July, the major LICs have moved from a small premium to small discount.
Five bargain LICs
There are more than 80 listed investment companies on the ASX, with the vast majority now trading at discounts. Here are five from different market sectors (ie large cap, small cap, international, Asian equities etc.) that are trading at discounts.
It is really important to note that LICs can trade at a discount for long periods – in some cases, years. And it is quite possible that the discount could get bigger before it narrows. That said, if you can be a patient investor and the investment is in keeping with your objectives, buying an investment for less than it is worth should ultimately be a rewarding strategy.
1. Hunter Hall Global Value (HHV) – International Equities
Discount to NTA at 8/7/16: 10.8%
Established in 2004, Hunter Hall Global Value (HHV) provides investors with easy access to a diversified portfolio of 40-60 global equities, including a strategic allocation to Australian equities. It is managed by Hunter Hall (headed by Peter Hall) and has a market capitalization of approximately $320m.
Performance has been strong in both an absolute and relative sense. In the 12 months to June, it returned 12.3%, and since inception, has returned 8.4% pa. Over 1, 3, 5, 7 and 10 years it has outperformed its benchmark (MSCI World).
One of the largest shareholders in HHV is another listed investment company, Geoff Wilson’s WAM Capital (ASX: WAM), which had an investment worth approximately $36m as at 30 June.
As at 8 July (HHV publishes its NTA each week), HHV closed at a price of $1.325, compared to an NTA of $148.6c, a discount of 10.8%.
2. Contango Microcap Limited (CTN) – Small caps
Discount to NTA at 30 June: 13.6%
Contango MicroCap Limited (CTN) is Australia’s longest running micro-cap LIC. Founded in 2004, the company invests in a diversified portfolio of ASX listed micro-cap stocks with a market cap of between $30 million and $350 million. It is managed by Contango Asset Management (headed by George Boubouras) and has a market capitalization of approximately $182m.
Performance has been very robust in both an absolute and relative sense. In the 12 months to June, it returned 19.44%, and since inception, has returned 15.8% pa. Over most time periods, it has outperformed its benchmark (All Ordinaries Accumulation index).
On 30 June, CTN closed at a price of $1.00 compared to a NTA of $1.158c, a discount of 13.6%.
3. PM Capital Asian Opportunities Fund (PAF) – Asian Equities
Discount to NTA at 8 July: 7.7%
PM Capital Asian Opportunities Fund Limited (PAF) provides investors with an opportunity to invest in a concentrated portfolio of predominantly undervalued listed Asian equities and other investment securities in the Asian region (ex-Japan). Listed in May 2004, it is managed by PM Capital (headed by Paul Moore) and has a market capitalization of around $55m.
PM Capital says that PAF’s investment mandate is based on its unlisted Asian Companies Fund. The latter fund has generally performed better than its benchmark (MSCI All Country Asia ex Japan Net Index in Australian dollars). To 30 June, the fund lost 7.3% for the 12 months. Since inception, it has returned 15.2% pa compared to the index return of 6.3%.
On 8 July (PAF publishes its NTA weekly), it closed at a price of $0.955 compared to a NTA of $1.0343, a discount of 7.7%.
4. Australian United Investment Company (AUI) – Australian Equities (Large Cap)
Discount to NTA at 30 June: 5.5%
Australian United Investment Company is a traditional LIC, investing in a broad mix of major Australian companies. The top 25 investment represent 83% of its total value, which with cash, is approximately $1.05bn. Charles Goode has been the Chairman of AUI since 1990.
Performance has been a little patchy over the last couple of years (which probably accounts for its discount), although on longer-term measures (7 years and 10 years), it has marginally outperformed the benchmark index.
Interestingly, Argo Investments (ARG) is one of its largest shareholders. At 30 June, Argo had a holding of approximately $120m.
On 30 June, AUI closed at a price of $7.15 compared to a NTA of $7.57, a discount of 5.5%.
5. Perpetual Equity Investment Company (PIC) – Australian & International Equities
Discount to NTA at 14 July: 9.0%
The Perpetual Equity Investment Company Limited offers investors access to a portfolio of predominantly high quality Australian and global listed securities. Managed by Perpetual Investment Management, it was established in December 2014 and has a market capitalization of approximately $233m.
As a relatively new LIC, performance figures are a little unreliable. Since inception, it has underperformed its benchmark (S&P/ASX 300 Accumulation Index) by 2.0% and returned 3.3% pa. However, over the last 12onths to 30 June, it has outperformed by 2.2%.
PIC publishes daily NTAs. On 14 July, it closed at $0.945 compared to a NTA of $1.039, a discount of 9.0%.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.