As the dominant spokesperson and promoter of LICs, Geoff Wilson, loves to say, the best feature of LICs is buying $1 for 80 cents. If boards, fund managers and existing holders are vexed, one group of stakeholders which can benefit is new buyers. Why are investors reluctant to buy discounted LICs? Many fund managers, such as Simon Shields at Monash, Sam Shepherd at Bennelong and Bill Pridham at Ellerston have exited the closed-end LIC structure to focus on other funds. When I was on the board of 452 Capital, the small LIC took as much management time as the multi-billion dollar unlisted portfolio. Loyal investors are already disadvantaged when their outlay at NTA is now worth 15% less than if they had gone into an equivalent unlisted fund at initial issue of the LIC.įund managers often start off loving the LIC structure because it locks in funds and fees with no potential for redemption and outflow, but they underestimate the work involved in managing a listed company and coping with the flak if performance is poor.
It’s also problematic to grow the fund by issuing new shares at a discount because existing holders are diluted when buyers come in at a lower price. If the manager also runs a large unlisted business, why would anyone invest at NTA in an open-ended fund when the struggling closed-end LIC is much cheaper? For members of the board of a LIC, as I have been in the past, the discount dominates board meetings with much time spent on near-fruitless attempts to remove the discount. While it's not a good look for LICs generally, it also reflects poorly on the market’s opinion of the fund manager when there is little appetite for their investment skills even when available at a 15% discount. This is disappointing for existing investors who cannot realise the market value of their investment but it’s potentially an opportunity for a new buyer.
Investors do not need to look too closely at a Listed Investment Company (LIC) report in our Education Centre to see that the majority trade at a discount to the value of their Net Tangible Assets (NTA).
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