As a rational value investor it makes sense to buy an asset at a price less than the tangible value of that asset with a view that over time the value will be realised.
Listed Investment Companies (LICs) trading at discounts to their net tangible asset values (NTA) can present a value opportunity but investors should be aware that if these discounts persist over time then this value may never be released.
A very basic illustration of a Discount and Premium to NTA;
You have $10,000 to invest in the stock market and you’ve decided to use an ASX listed investment Company (LIC) to gain exposure to a particular equities strategy.
LIC OPPORTUNITY 1 | DISCOUNT TO NTA
A basket of listed stocks with an underlying market value of $10,000 are available to you in a LIC to buy for a 10% discount i.e. you pay $9,000 for $10,000 worth of stocks.
LIC OPPORTUNITY 2 | PREMIUM TO NTA
A basket of listed stocks with an underlying market value of $10,000 are available to you in a LIC to buy but at a 10% premium i.e. you pay $11,000 for $10,000 worth of stocks.
So what causes this disparity and what should investors look for when it comes to buying LICs at discounts to NTA?
A LIC premium to NTA can exist when there is a lot of shareholder demand for the LIC or if the company is issuing more shares at a price greater than the NTA, this can drive the LIC share price up over and above its underlying asset value. Hypothetically, if the portfolio was liquidated each shareholder would be returned less per share than the share price.
The opposite is true for LICs trading at discounts, if there is little demand for a LIC there can be downward pressure on the share price causing it to trade at a discount to its underlying asset value. In addition, if a company issues more shares in the LIC at a share price lower than the NTA this can further exaggerate the discount. In the case of a LIC trading at a discount, hypothetically, if the portfolio was liquidated each shareholder would be returned more per share than the share price.
Surely the rational investor would take advantage of the discounted opportunity however not all LICs are created equal. In our view, the following is a list of the key items investors can use to gauge whether a LIC trading at a discount could move towards trading at NTA or even a premium.
It’s not an exact science but in our view a LIC trading at a discount exhibiting many positive attributes mentioned above could present an opportunity for shareholders who could benefit from unlocking value via the narrowing of the discount over time.
Important Information: This material has been prepared by NAOS Asset Management Limited (ABN 23 107 624 126, AFSL 273529 and is provided for general information purposes only and must not be construed as investment advice. It does not take into account the investment objectives, financial situation or needs of any particular investor. Before making an investment decision, investors should consider obtaining professional investment advice that is tailored to their specific circumstances.