A top fund manager once told me it’s not enough to spot an undervalued share. Investors must identify the catalyst to re-rate that share.
That advice is timely for Listed Investment Companies. On some measures, the LIC sector is as unloved as it has been in years. Only 12 of 88 LICs traded at a premium to their Net Tangible Assets (NTA) at end-January 2024, ASX data shows.
By my count, at least half of all LICs trade at a discount of more than 10% to their NTA and many are close to 20%. I’ve covered the LIC sector on and off for decades and cannot recall it being this out of favour (outside of market shocks).
Highlights are rare. Plato Income Maximiser (ASX: Pl8), a favoured income fund of this column over several years, trades at a significant premium to NTA and continues to do well. Private-credit LICs, covered in last week’s column, also trade at small premiums to NTA as interest in private credit grows.
Many more LICs, however, now trade at discounts larger than those during the early stage of the COVID-19 pandemic in March 2020, when equity markets tanked. Savvy investors view discounts as an opportunity rather than a risk.
In theory, buying an LIC at a 20% discount to its NTA means getting $1 of assets for 80 cents. Across the LIC sector, there are billions of dollars of value not recognised in current LIC share prices, based on the average discounts.
If that sounds too good to be true, it’s because it is. Although the LIC sector looks cheap based on NTA discounts, the same argument could be made this time last year or the year before. A cheap sector got even cheaper, frustrating investors and LIC managers.
Structural and cyclical factors explain the widening of LIC discounts this year. As closed-ended funds, LICs can trade below the value of their underlying assets (the NTA) because the market is concerned about the manager’s performance, dividend record, underlying portfolio, or liquidity.
Cyclical factors working against LICs include rising interest rates and higher term deposit rates. The LIC sector’s main attraction, attractive franked dividends, is less appealing when one can get 5.35% from a term deposit’s introductory rate.
The boom in active Exchange Traded Funds, and ETFs generally, is also weighing on LICs. Assets under management globally in passive funds have now overtaken those in active funds. Like other active managers, LIC managers watched the ETF juggernaut take more market share from active funds.
The risk of changes to franking credits could be a factor. In 2018, Labor’s policy to stop franking credit refunds spooked LIC investors. Although that pledge was dropped after vocal industry opposition, the LIC sector never fully recovered from the uncertainty. There’s no talk of that policy idea being revisited, but the Federal government has shown it will break tax promises with the Stage 3 tax cuts.
Value or value trap?
Risks aside, contrarians should ask: why is the LIC sector trading at historically high discounts when global equity markets are trading at near record highs? And is this an opportunity for long-term investors who can buy LICs at a double-digit discount to their NTA and potentially earn extra returns as those LICs are re-rated?
For all the negativity, there were good signs in the latest profit reporting period. Many LICs continue to report a solid cash reserve, meaning their future dividend payments are well covered. The ability of LICs to smooth dividends and franking out of profits is an advantage over unlisted and listed trusts. This strength of the LIC structure has never been sufficiently promoted.
Many LICs also have ongoing share market buybacks to reduce the number of shares in the LICs and narrow discounts. This strategy, however, has made little difference to discounts because many of the buybacks lack sufficient scale.
The core problem for LICs remains: there are too many of them. Smaller LICs on ASX lack the size to fund sophisticated investor relations programs to attract interest in their stock and liquidity. Moreover, some larger LICs over the years saw this market as a way to attract additional funds under management and haven’t done enough to promote their LIC or the LIC market.
Which brings me back to re-rating catalysts. Expect to see a spike in takeover activity in the LIC sector over the next 12-18 months. LICs trading at a large, persistent discount to NTA are vulnerable. Although there have been more LIC takeovers in the past few years, the big consolidation wave is yet to occur.
This is true of active funds management generally. One response to the boom in passive investing via ETFs is for active fund managers, including those with only unlisted funds, to seek greater scale through acquisitions and takeovers. The goal: more funds managed by the same core group of managers, to derive economies of scale.
Some activist investors in LICs have been increasing their stakes in LICs in the past six months, suggesting they, too, see more value in the sector – and a need for faster sector change through sector consolidation.
Several LICs have declared they will consider converting to an unlisted structure if the discount persists or have made plans to do so. A few years ago, there were 114 LICs on ASX; now there are 88, although the value of the sector roughly remains the same. The value will decrease a little as some key LICs convert to an unlisted managed fund structure.
For prospective investors, an LIC takeover can be a catalyst to get the share price closer to the NTA, providing an extra return for investors. As I have written over many years for this report, a takeover should be considered a bonus rather than the core reason to buy. The stock should represent value, with or without a takeover.
The two LICs below are trading well below their NTA and come from quality asset managers. Both suit long-term investors who want to take advantage of current weakness in LIC valuations, with or without takeovers or a change to their structure.
- Platinum Capital (ASX: PMC)
The ASX-listed investment company provides exposure to the global equity’s strategy of Platinum Asset Management, a prominent asset manager.
At $1.31. PMC trades at a 15.4% discount to its latest stated pre-tax NTA of $1.55 a share. PMC’s five-year discount high is 19%, according to Bell Potter data, meaning the LIC’s current discount is near the high of its range. Buying LICs when they trade well below their historical discount average can be a profitable strategy.
PMC’s pre-tax NTA increased 3.4% over one year to end-February 2024, compared to 27.5% for its benchmark index. PMC has underperformed over the past 10 years; investors were far better off holding an ETF over the MSCI AC World Index than investing through PMC.
PMC argues its portfolio trades at around a 46% discount on an asset basis and has a 51% higher earnings yield than its benchmark index. The value is there for prospective investors, but how much longer will current investors wait for this value to be realised, after years of underperformance in PMC?
Something needs to change to narrow PMC’s persistently large gap between its share price and NTA – a problem for several global equity LICs.
Chart 1: Platinum Capital

Source: Google Finance
- Djerriwarrh Investments (ASX: DJW)
From the same team as Australian Foundation Investment Company (AFIC), the market’s largest LIC, Djerriwarrh, trades at an 11.5% discount to NTA, on Bell Potter’s numbers.
Over five years, DJW has ranged from a discount of 11.6% to a premium of 11.6%, Bell Potter research shows. If one subscribes to the theory that LICs revert to their median discount over time, DJW looks undervalued. There have been periods where DJW has traded at a decent premium to its NTA.
For income investors, DJW has a gross yield after franking of 7.3% and uses an options strategy to enhance the income return.
By historical standards, DJW looks oversold at its current price and provides cheaper exposure to the Australian equity strategies and the expertise of AFIC.
Chart 2: Djerriwarrh Investments

Source: Google Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation, or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation, and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 21 March 2024.