Investing In LICs Trading At A Discount To NTA

1. What does Net Tangible Asset (NTA) mean?

Listed Investment Companies (LICs) operate in the same way as retail managed funds, except instead of buying units you buy shares, which trade on the Australian Securities Exchange (ASX). These shares can either be trading at a premium or a discount to their NTA.

NTA is the total assets of a company, excluding intangible assets minus total liabilities. The NTA amount is divided by total number of shares outstanding, to give an NTA/share number. If the company’s share price is lower than its NTA/share, it is trading at a discount to NTA and vice versa.

2. Why might an LIC trade at discount to NTA?

There are a number of reasons why a LIC may trade at a discount to its NTA including:

  • Poor investment portfolio performance, or for newer LICs, having no established past performance.
  • Lack of fully franked dividends, a poor track record of paying them, or a perceived inability by the market to pay fully franked dividends in the future.
  • Highly leveraged structure or just paid at a dividend leading to lower NTA calculations.

However, focusing too much on premiums or discounts is a distraction from what investors should be looking at: what absolute return do you expect this investment to generate over your investment timeframe?

Below is an illustration using two LIC’s with identical performance:

 

In the example above, investors can have $1 worth of assets at the acquisition cost of $0.90c by investing in LIC 1. That 10% discount is actively offering a free investment kick of 11.11%. Both LIC’s saw their NTA/share increase by 10% (to $1.10), but investors of LIC 1 has a free investment kick of 11.1% and now have $1.10 worth of assets acquired for $0.9c whereas investors in LIC 2 has only just realised their initial investment of $1.10. If both companies paid $0.10c dividends, investors in LIC 1 would’ve seen a yield of 11% and LIC 2 would see a yield of 9%.

As such, a discount provides a great buying opportunity for prospective investors to get exposure to the LICs’ underlying assets for less than their value.

3. Trend of LIC’s in Australia

Over the past four years, the number of LIC’s listed on the ASX has doubled from 51 to 101, with their combined market cap rising over 51% to over $33 billion. Australian LIC’s trade at an average discount to pre-tax NTA of 3.98% according to Morningstar. With a better outlook ahead for the Australian economy as well as another period of low interest rates, LIC’s which trade at a higher discount to NTA present good buying opportunities for investors looking for investment products that are liquid, accessible with the benefit of listed company governance standards and diverse investment styles.


As of the 29th September 2017 this information is accurate. The information contained in this article or video is general in nature and does not consider your personal financial situation.  The information is not a recommendation or offer to buy securities.  You are advised to seek professional financial advice prior to making any investment decisions.  The views expressed in this article may change at any time, such is the nature of the investment markets. Past performance is not a reliable indicator of future performance.

Written by Glennon Capital
Article posted 29/09/17