Are LICs licked?

Over the last 5 years the ASX 200 has risen 51%. This rise can be compared to the % price rise over the same 5 year period (9/20-9/25) for the various LICs and EFTs referenced in the article and comments.

LICs
AFI 14%
ARG 23%
AUI 41%
CAM -11%
GVF 31%
OPH 8%
PL8 37%
VG1 -4%
WAM -17%
WAR -16%
WAX -15%
WGB 23%
WHF 18%

ETFs
A200 50%
DHHF 67%
IOZ 47%
MVW 46%
STW 44%
VAS 45%
VEU 50%
VGS 87%
VTS 109%

Conclusion: LICs are licked.

"Over the last 5 years":

"AFI 14%" [ actually 14.86% ]:
when not including dividends and corporate actions.
and
36.14%
including ... .
https://www.marketindex.com.au/asx/afi/advanced-chart

A200 50.58% and 84.10%
VAS 46.89% and 79.23

Hi James,
You briefly touched on a point but feel you could've expanded on it further:
"And related to that: why aren’t investors stepping up to buy these discounts, with the prospect of paying 90 cents, 80 cents, or even 70 cents for every dollar of assets?..."
Perhaps the basis of another article?

In our local market we have the likes of GVF, WAR (and Wilson's other LICs) and Affluence Funds Management who seek to profit through buying a dollar of assets for 70/80/90c and then capturing that discount through stakeholder engagement, through agitation, restructuring, etc. Observers of LICs will occasionally see Saba Capital or City of London Asset Management or other foreign buyers coming in.
It would appear that there is an incentive for discount capture and parties who are interested in identifying and executing such opportunities... but why is it not more common in Australia?
GVF's communications suggest much more established norms in the UK/US for addressing persistent discounts.
As an example why don't we see more 'brute force' tactics from some of these overseas buyers? Depending on size of discount, shareholder base composition etc, there could be millions to be made just left on the table.

As a 79YO I have reduced active investment in individual companies, but hold a small number of LIC's on a 'buy and hold' basis with dividends reinvested. I bought these at a discount to NTA at the time and am unconcerned if they continue to trade at a discount to current NTA as they are all showing a good profit and effectively I was paying $0.80 for $1.00 of assets at the time. In fact I sold several Wilson funds that were trading at an ongoing surplus to NTA as I was selling $1 in value for $1.20.
Ranking my current LIC holdings from earliest purchase to most recent, the unrealised gains of each are as follows as at this morning:
245.3%
185.5%
18.3%
24.4%
I also think that when comparing the discount to NTA of LIC's to LIT's and ETF's, it is the after-tax discount that is more relevant

My situation (62 year old) is a bit similar to David's, ie. I sold most of my individual companies and now hold about four core LICs, being WAX, WGB, CAM and WHF. Three are up, one is down (on PP basis) but they all pay good, steady dividends which suits our situation. Plus, they are transparent and can initiate capital management plans if they choose. The owners also hold significant % of the stock, which gives confidence.
I know I'm against the "trend" but I don't like ETFs for all the above reasons.

at the end of the day, it should not be about investing only in LICs versus only ETFs.
they both have their Pros and Cons.
I use both, but only buy long established LICs at substantial discounts.
if you buy AFI, AUI, ARG etc when they are trading at double digit discounts, you are likely
to get a better return than the quoted performance figures.
And a much easier time at EOFY tax return than with managed funds or ETFs.

What ETF trash. Following an 18 year sojourn in the UK, I am delighted to still be holding my 4 UK LICs.
All old and the masterpiece is one that has been around for over 160 years. It has increased its dividend every year for the last 57 years. They all pay quarterly dividends which means 16 payments to ensure a STEADY flow of growing income. The structure of ETFs is useless.
We have to grow up.

I share the view of Peter Thornhill, reliable income and transparency about what each basket contains.AFI ,ARG, WAM etc have been running their investment marathon with moderate balanced transparent risk and reliable outcomes.

Thank you for that comment Peter, I agree with you.

Good Stuff Peter. I was hoping you would come out swinging!

I respect Thornhill’s “steady income + LICs” approach, it’s proven, simple, and psychologically comforting. But to dismiss ETFs wholesale seems like overkill. They do almost everything LICs do (dividends + exposure + broad diversification) but with lower friction. I like the broad-based, low-fee index style ETF's eg VAS/VTS/VEU. Kids have DHHF rather than an old school LIC

Hi Peter, I'm your fan and I'm grateful to discover your book early on my investing journey. Looking forward to your update in 2025. Thank you.

How true Peter Thoirnhills comments are.
Interestingly, in A Randon Walk Down Wall Street, Burton Malkiel espouses the value of low cost index funds but specifically mentions that quality “closed end funds” ie LICs are better still.

Peter have you ever look at what would have happened if you'd put the money into index ETFs or managed funds instead? Presumably the dividends/distributions would be less predictable but I'm sure you could have managed that with a cash buffer, and potentially the growth on the ETFs would have been higher so you might have ended up in a better off position?

Hi Peter, agree with you and also been looking forward to you providing a 2025 update!

And why are ETF's useless ?

Over 10 years the AFI LIC TSR shows a 7.9% annual return (Argo shows 6%), the ASX200 Accum Index at 11.9% and the Van Eck Aus Equal Weight ETF at 10.3%.

ETFs offer liquidity, very low fees and buy/sell at the NTA. I don't want problems with discount to NTA.

I agree with davidy. I bought WHF (a Thornhill favourite) at the same time I bought VAS, around 9 years ago. I've persevered with the poorer performance, lack of transparency, higher fee and lack of liquidity. I'm currently in the process of moving 100% to ETFs. Investment in LICs is only going to decline from here, affecting liquidity and potentially increasing fees.

Annabel,

I've never seen data on holders of LICs and ETFs by age.

I'll have a search though.

James

Annabel. I think you logic is incorrect. A LIC is a company. If you sell your shares somebody will buy them and it does not affect the capital of the company. LIC's will survive as long as there are good companiies to invest in. I know of one well respected analyst which has stated that AFIC and ARGO are shares that you can buy, put in the bottom drawer and forget about them as they are very safe investments. ETF'on the other hand could collapse if too many share holders withdraw their investmment. This could be a real possiblity in thhe future with new types of investment vechicles coming on to the market and changing investor sentiment

When I read an LIC report, I learn very little about the business, except for the top 10 or 20 holdings.
How much income is from dividends? How much is from capital gain? Did CG get paid out as dividend, or reinvested?
They are not helping investors to understand their business. Understanding leads to trust.

They could take a look at the property trust sector, which is similar. Funds From Operations (rent) is separated from mark to market gain/loss, is different to actual sales & purchases.

I am also unimpressed with low dividends & large differences between NTA & after tax NTA. Why should I pay for a tax liability? Currently AFI pays 3.6%. I can put together my own portfolio of 20 stocks that does better than that.

I have owned a few LIC. VG1 paid a good div, & I made a CG when selling. Currently own CAM, which pays a great quarterly div.

You need a good reason to buy a stock. LIC's often don't provide a good enough reason.

Great discussion, I invest in both and also wonder how much of the current discounts are due to cyclical trends vs changing fashions.

This is a bit tongue-in-cheek, but perhaps savvy ARG/AFI investors realise that the ASX is overvalued, whereas VAS investors are blindly paying full price for a basket of overvalued banks :)

"ARG/AFI investors realise that the ASX is overvalued":

ASX ARG 31 August 2025 (last day 29th):
Share price 9.59
https://www.marketindex.com.au/asx/arg/announcements/weekly-nta-estimate-fri-5925-2A1620307

pre-tax NTA $10.81; premium 17.7%
post-tax NTA $9.18; discount 4.3%
https://www.listcorp.com/asx/arg/argo-investments-limited/news/monthly-nta-and-amp-investment-update-31-august-2025-3238866.html

Concerned the great pile of franking credits will be discounted by inflation before they receive them?

"ARG/AFI investors realise that the ASX is overvalued":

ASX AFI 31 August 2025 (last day 29th):
Share price $7.33
https://www.marketindex.com.au/asx/afi

pre-tax NTA $8.34; premium 13.8%
post-tax NTA $6.95; discount 5.2%
https://www.marketindex.com.au/asx/afi/announcements/nta-top-25-investments-as-at-31-august-2025-3A675546

Shareholders with 0% tax rate can buy (distant future) franking credits for:
= (8.34 - 6.95) / 7.33
= $0.18 / $1
?(?)

One of the problems with ETF's is they are not 100% franked.. This means that my tax liablity grows as my portfolio grows. Yuk!!!!.. To reduce this tax liablity I have some LIC's which have a diversified portfolio and pay a fully franked dividend.I have also invested in blue chip shares such as Woolworthhs and BHP to reduce tax but that has not worked out. I think a diversified portfolio as many experts advocate is the way to go..I have no regrets about holding some LIC's and will probably buy more in the future. I don't blindly follow the herd but think about what is best in my circumstannces.

Being 100% franked is good, but you have to ask if franking credits influence the investment decisions of the LIC's, meaning do they preference companies that pay fully franked dividends, at the expense of those that do not. Is this the best overall investment return for the shareholders?

Forager Funds Mgmt. bit the bullet and moved from LIC to MF. Not and easy transition and handled very professionally with excellent communication.. Result from value of approx $ 1.26 (listed) to currently about $2.25 AFTER paying a very good EOFY payment and one of the BEST performing Small Cap funds last FY.

I may be stupid but I have never understood the fascination with the NTA of an LIC. What surely matters to an investor looking to buy or sell is the return - comprising dividends and capital gain/loss. An LIC trading at a discount to NTA ought to be able to pay a higher dividend (given it is making that dividend on a larger asset base) BUT it is the dividend that the investor should be looking at, not the NTA per se. As for capital gains, one might argue there is greater scope for capital gain from an LIC trading at a discount to NTA, on the assumption that it might be able to close the gap. But again it is the actual performance of the share price that matters - not the NTA per se. Having watched this debate as a bemused observer for a decade now, it is pretty clear to me that the investment performance of the LIC managers is what drives the share price, and the NTA has sfa to do with it.

Hi James,

from the your list of comments, I think the answer to your headline is definitely no - LICs are not Licked.

It looks like a lot of people have thought deeply about them as an alternate to managed funds and ETF. A question about whether they will continue to exist will really be up to the demand for them from people like your commentors who take the effort to understand how they operate. They also have sufficent diversity to suite different types of investors.

I personaly think they will exist because they have proven they can outperform ETF. I say "perform"with regard to performance of the underlying investments not the dicount producing popularity vote. Further, the ETF mechanisms both for automatic and active ETFs has not been tested in a market meltdown. ETFs were too small in the last meltdown (COVID). An ETF will be forced to sell as people liquidate but a LIC will be able to sit it out and buy at the bottom.

Thanks for the article.

proven they can outperform ?
show me which LICs have outperformed either the ASX200 index or the S&P500 over the past 10 years ?
very few if any.

Since 1999, WAM ( WAM Capital Limited ) has outperformed ASX200 PER ANNUM BY 7% - compound ! And this despite always holding some cash.

OJ,

For WAM, that's gross performance I think. What's the net?

How they get away with quoting gross performance is beyond me - it's an abomination.

OJ, have a look at WAM performance over the past 10 years. they did well only in in the earlier years.
over the past 10 years, share price + divvies reinvested only 6.3% p.a, pretax NTA + divvies only 7.3% p.a.
the ASX200 has done 9% p.a.
that's underperformance !

Hi CC,

I think you have hit on the problem of comparing investment vehicles. What exactly does "performance" mean. I divide it into "investor performance" which includes historic market prices and dividends (and therefore discount to NTA), and "manager performance", which is straight NTA plus dividends. I beleive that in the long run the second is more important and the market price will trend to NTA.

There are two wrinkles to the above. The main one is franking credits which form a large part of the total return of an investment and the second is the old style LICs which do not take their capital gains (AFI, ARG, etc.) and leave it to the investor to pay captial gains tax when they sell their securities. Newer style LICs, e.g. WAM convert capital gains into taxable profits and pass the paid tax onto investors as franking credits in a smoothed out way over time. ETFs and LITs of course, as trusts, pass everything onto the investor to sort out at tax time. This makes ETFs and LITs dividends rather inconsistant though AMIT conforming trusts, like AREITs do have the ability to smooth out dividends.

So, looking at "manager performance" (NTA plus dividends plus franking) in six month periods since June 2009 until the six months ending June 2025, when the largest ETF VAS was listed, I get the following average total manager six-monthly returns (percentages):
VAS AFI ARG WAM
Capital return 2.64 2.02 1.86 1.94
Dividend 2.14 2.01 2.00 3.87
Total return 4.78 4.01 3.86 5.71
Divi incfranking 2.85 2.88 2.85 5.29
Total ret incfranking 5.49 4.89 4.71 7.24

So the share price (capital return) on my numbers is worst for WAM (newer style LIC) but the total return which includes franked dividends is far higher for WAM (even though WAM has only 50% franking in the last few years). As an investor you must also realise that the capital return will generate capital gains tax when you sell your investment so WAM will have the lowest liability and the VAS ETF will have the highest. It is also interesting to note that the dividends and franking credits form over half the total return even though few investors concentrate on the dividend or franking when purchasing investments.

WARNING: the data to produce these figures is typed in by me (rather obsessively) from monthly NTA releases to the ASX. I have been doing this for all LICs since 1998. There are sure to be errors in my typing. I do not and never have worked in the finace industry, though I have been investing for over 40 years.

But in crash the exit price of the LIC is set by the market (not the NTA) hence there can be a large discount to NTA. At least the ETF sells/buys at the NTA and is liquid.

To Roger K,
Not sure if it's gross performance or not. Of course there are no fees "taken out" of the ASX200 index, so Wilson Asset Management might justify themselves this way. (Anyone from Wilson Asset Management reading this forum? )
I don't think any "index" ETFs have been around since 1999 to compare.

James, it would have been good to include data on the age difference between LIC and ETF investors, particularly new investors. Younger investors are very fee conscious, and prefer the transparency of ETFs. This will impact the longevity of the LIC sector.

We should talk about lack of Transparency in LIC world here. I note that the Wilson group of LICs all report performance exclusive of fees. Active ETFs and Managed funds are less able to hide behind this as their performance is captured in the unit price.

I own LICs (ARG, AFI) and often thought - if managing in the interests of shareholders, what is the process to convert to an EFT if the NTA issue persists and does not change?

Are there any cases of such conversion and what have the results been?

Yes. Monash Investors absolute return fund and Magellan high conviction are 2 examples that spring to mind.
The discounts are eliminated

My view on utilising either LIC's or ETF's as a mainstay of my SMSF, is that the structure of my LIC portfolio allows me to sleep well at night, knowing that year on year my returns will even out smoothly, [profit reserve holdings] rather than having ALL the profits disseminated each year, complying to the Trust Structure mandate. I currently hold nine LIC's that track a diverse range of indices - ASX Large/med cap, med/small cap. international funds, small cap/unlisted businesses. As with any investment the LIC's will have some "regretful" moments, but their options to diligently reduce the damage and reposition the holdings has thus far proven positive to me. ETF's for me, are a "longer term" option that may suit younger investors who could absorb the low/non income years that inevitably will occur!

To judge a LIC solely based on the prevailing Price/NTA is a bit simplistic in my mind and smacks of investors driven by market sentiment rather than business fundamentals. Maybe investors need to employ a bit more second-level thinking and focus on the how the LICs generate its revenue base that supports the dividends/distributions for shareholders. If the revenue base is strong and the cashflow returns to shareholders are stable, why do I need to be concerned by the Price/NTA debate. Besides, there is too much tax complexity associated with receiving trust distributions (ETFs) these days.

Very sensible thoughts. Even the pre-tax/post-tax discount debate is a bit irrelevant if you do not intend to sell. Even passing on to those who will inherit them will not trigger CGT.

The potential to be wound up is the only war I see NTA discount/premium as relevant.

Comparing the discount to NTA is only part of the story. The premium of some of the larger older LICs to their after tax NTAs is an issue. Even with the tax deduction which they can pass through to shareholders, one is still buying nett $1 for more than a $1

it is my understanding that, since ETF's are still a trust structure, they must distribute realised capital gains each year. This leads to two basic outcomes.

The first is that the investor has no ability to control the level and timing of those gains. The second is that capital is released and, unless the investor is aware, it is highly likely the capital will disappear into cash and be consumed. Hence, the ability for the ETF to grow in value is limited.

The extreme is an ETF such as an "emerging leaders" ETF. Once an underlying investment has "emerged" as a leader, it must, by definition, be redeemed from the fund.

Being a bit simplistic, in the limit, all of the fund's investments must be sold. The investor is likely to be disillusioned since the fund, which they anticipated would be a growth fund, does not actually increase in value.

If I am correct, the same applies to unlisted managed funds.

From my limited experience, some accountants were critical of unlisted managed funds for these two reasons.

What about Soul Patts (especially now that the merger with BKW is complete)-they are an LIC with an outstanding performance and dividend track record

Hi Kevin,

Soul Patts is a great company but it isn't a LIC.

Dividend track record is fine, but below par at around 2% to 3% + franking. Milton was a reasonable payer until it was absorbed into SOL. I have sold SOL and placed funds in 2 of Geoff Wilson's funds for income in retirement. Returns of up to 7% including franking was the attraction. I believe BKI is controlled by the same Milner outfit. Hope they leave that one alone.

There's one other aspect the article didn't touch on: internal or external management of the LIC. The old established larger LIC's - Argo, AFIC and the old "Potter" ones - are internally managed and are frugal with costs. There is nothing to stop capital management if the discounts are too wide. On the other hand, the externally managed LIC usually has a very compliant board of "mates of the manager" and are loath to buy back stock - even at extraordinary discounts - as it reduces management fees for their "sponsor". On private LIC's, you can buy European holdcos with an embedded funds management business at a 50% discount to NAV (Eurazeo, Wendel for example). It's one of the great ironies - the companies that PRODUCE PE product by and large trade at nosebleed valuations (BX, KKR, APO, ARES - because they are amazing businesses) but their output trades as detritus.