A Checklist for Buying LICs at a Discount to NTA

As a rational value investor, it makes sense to buy an asset at a price below its tangible value, with the expectation that, over time, this value will be realised. Listed Investment Companies (LICs) trading at discounts to their Net Tangible Asset values (NTA) can present compelling value opportunities. However, investors should be aware that such discounts can persist indefinitely, meaning the value may never be fully realised.

Understanding Discounts and Premiums to NTA

Set out below is a basic illustration of how LICs trade at discounts or premiums:

1. LIC Opportunity 1 | Discount to NTA

• A basket of listed stocks with an underlying market value of $10,000 is available to buy through a LIC at a 10% discount.
• ‍You pay $9,000 for $10,000 worth of stocks.

2. LIC Opportunity 2 | Premium to NTA

• A basket of listed stocks with an underlying market value of $10,000 is available to buy through a LIC, but at a 10% premium.
• ‍You pay $11,000 for $10,000 worth of stocks.

What Causes Discounts or Premiums to NTA?

Premiums to NTA:

A 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.

Discounts to NTA:

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.

Checklist for Evaluating LICs Trading at a Discount to NTA

In our view, the following is a list of the key factors investors can use to gauge whether a LIC trading at a discount has the potential to move closer to or exceed its NTA:

The Opportunity for Investors

LICs trading at a discount to NTA may offer significant opportunities, especially if they exhibit many of the positive attributes mentioned above. Over time, factors such as improved performance, management initiatives, or changing market conditions may cause the discount to narrow or even flip to a premium, unlocking value for shareholders.

As always though, due diligence and a clear understanding of the risks and rewards are essential when considering any investment opportunity.

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