Why do LICs tend to trade at a discount?

[mcgrath111]

Hi All,

As I'm becoming a more passive investor I have moved to ETF's primarily. However, would like to add some LIC's into the mix as some offer a bit more diversity.

However, I have noted that most LIC's trade to a discount to their NTA (10-15% discount), what is the possible reasoning behind this?

Cheers

 

[peter2]

This article contains some opinions on the matter.
https://cuffelinks.com.au/lics-trade-premiums-discounts/

 

[mcgrath111]

This article contains some opinions on the matter.
https://cuffelinks.com.au/lics-trade-premiums-discounts/

Great article, thanks Peter.


The article mentions that during the GFC Weiss and Carousel Capital took positions in LIC's trading at a discount.
Hypothetically, could a company or individuals gain a large enough stake in a business, liquidate all assets to get back the tangible assets? (I imagine regulations would exists to prevent this)

 

[kid hustlr]

Great article, thanks Peter.


The article mentions that during the GFC Weiss and Carousel Capital took positions in LIC's trading at a discount.
Hypothetically, could a company or individuals gain a large enough stake in a business, liquidate all assets to get back the tangible assets? (I imagine regulations would exists to prevent this)

Yes,

but it gets slightly more complex (tax implications of selling assets etc) which can make the trading NTA vs the liquidated NTA quite different

 

[So_Cynical]

Hi All,

As I'm becoming a more passive investor I have moved to ETF's primarily. However, would like to add some LIC's into the mix as some offer a bit more diversity.

However, I have noted that most LIC's trade to a discount to their NTA (10-15% discount), what is the possible reasoning behind this?

Cheers

LIC's also pay fully franked divis while the vast majority of ETF's dont, not 100% anyway.

The LIC NTA discount varies with general sentiment and specific sector and stock sentiment, generally the older bigger LIC's have a smaller discount, most/all the Wilson funds trade at a premium.

Bellpotter do a quarterly LIC report, some good commentary and ideas.

https://www.belldirect.com.au/smarter/images/uploads/bell_direct/pdfs/LIC_Quarterly.pdf

 

[Belli]

I think it depends on which LICs you are referring to. The NTA of each LIC and its premium/discount changes from period to period. However, while some report daily, some weekly and some monthly, they are in effect historical.

I'm a passive income investor as I have zero skills in assessing individual shares. So for me, both personal and in the SMSF, is AFI, MLT, PMC, STW, VGS and, although it really isn't classified as an LIC, SOL. For the rest I don't follow or take any notice of them.

I hold LICs as, although minor, they are my "active" approach where the managers can adjust the holdings. All low cost in my view as fees can eat away at returns.

I've no other income sources and live, quite well as far as I'm concerned, off dividends and an account-based pension. The surplus from the account-based pension is invested with a view to increasing my disposable income.

 

[mcgrath111]

Great, thanks all.

Think I'll stick with passive ETF's for the time being. The associated fee's seem exuberant.

 

[InsvestoBoy]

Some LICs are worse than others. Some seem pretty reasonable for a bit of active management. I like ASX:AFI, very long track record, goal to pay growing fully franked dividends, fee not much higher than ASX:VAS.

The passive approach might see you herding into sectors that bubble (although there is ASX:MVW which can avoid that), although no guarantee that active managers won't succumb to their own herding I guess. If you look at the ASX:AFI annual report you can see they include graphs which show their sector over/underweights vs the index.

I personally hold a bunch of ASX:VAS in my super but I feel uncomfortable about it. We've imported the market cap weighting concept from overseas, where the economies are much more developed/diversified and the sector balance ends up alright. If you look at NYSE:SPY, which even with the crazy outperformance of the tech stocks over the last 10y, the biggest sector weight is tech at ~22%, the next biggest is financial services at 16%. If you look at ASX:STW the biggest sector is financial services at a whopping 32% with the next biggest being materials at 17%.

We like to think we are a developed economy but our sector weights and index performance over the long term is much closer to an Emerging Markets index.

 

[InsvestoBoy]

Just to emphasise that, here is the sector weighting graph vs index for AFI from their most recent annual report. FWIW.

 

[So_Cynical]

Great, thanks all.

Think I'll stick with passive ETF's for the time being. The associated fee's seem exuberant.

I sold out of my 2 ETF's a while back, now have a few LIC's and one LIT, AFI have a super low MER and the FF dividends are hard to pass up.

 

[Skate]

I sold out of my 2 ETF's a while back, now have a few LIC's and one LIT, AFI have a super low MER and the FF dividends are hard to pass up.

Hi @So_Cynical

I know that ‘Listed investment trusts’ are incorporated as trusts, whereas LICs are incorporated as companies.

While LICs have the ability to pay franked dividends and these distributions carry the franking levels allocated by the underlying investments.

My Question

As LITs must pay out any surplus income to investors in the form of distributions do those distributions have franking credits attached to them ?

Skate

 

[mcgrath111]

I sold out of my 2 ETF's a while back, now have a few LIC's and one LIT, AFI have a super low MER and the FF dividends are hard to pass up.

Reasoning behind sellling the etf's?

 

[So_Cynical]

My Question

As LITs must pay out any surplus income to investors in the form of distributions do those distributions have franking credits attached to them ?

I have never seen a LIT pay a franking credit, must be something to do with the tax structure, same as REIT's

Reasoning behind sellling the etf's?

The index fund i held was up like 20% and i figured that the open profit was the same as about 6 years of dividends and the markets were toppy (6 months ago) so i sold, the other ETF was a dividend stripper type of fund that just wasn't really working as planned and i had the opportunity to exit for a very small profit so did.

Timing turned out ok on both counts - LIC's are a better structure to hold, franking credits and its much easier at tax time with auto fill.

 

[Belli]

Off topic but in regard to auto-fill it doesn't happen with ETFs due to the various components which comprise the distributions. The AMIT aspect also has to be taken into account.

I'm OK with buying the one I hold, STW, when the yield is greater than those LIC's I hold.

LIT's are a Trust as you know and so a tax through structure. No franking applies I believe. Some stuff from the ASX

https://www.asx.com.au/education/in...e-new-wave-of-asx-listed-investment-funds.htm

Could be more of them and other arrangements, special dividends or capital return?, if the franking policy of a future Labor Government is implemented.

 

[IrishDigger]

Nothing to add at this stage but good to see a topic on LIC's.

 

[HelloU]

afi offers divs as bonus shares if you want to keep it out of ur tax return (for a while)

 

[Belli]

Nothing to add at this stage but good to see a topic on LIC's.

I don't post often either as the vast majority of stuff is General Chat - too much underlying flame wars and I cannot be bothered with it - and individual shares which obviously don't interest me.

I wouldn't be getting my hopes up that will change.

I regard to HelloU's comment about BSP, I think there is another, WHF, which has one in operation. Useful I suppose for those who may wish to defer tax or whatever. No franking attached and not considered income so not required to include in annual tax return. However, subject to CGT when sold. Cost base is, I think, the issue price.

 

[HelloU]

heads-up, for an assessable tax world where the credits may be refused anyway (and ironically so might the welfare as a direct consequence)

 

[Belli]

Threw a few dollars at both MLT and VGS on 24/12 for the SMSF and personal.. MLT a little bit below NTA and yield is reasonable.

Will get some distributions from STW and VGS in January so that'll top up the cash.

I'll just keep plodding on when I gather in my personal account somewhere between $10k to $15k to put in.

As for the policy proposal from the ALP, not overly fussed. I don't invest with a view to living off tax refunds.

 

[MrChow]

The ones like ARG, MLT, AFI have traded at a premium for most of this bull market.