Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 323

Managing LIC discounts and premiums

Over the course of the last 12 months we have seen discounts to NTA grow wider in most of our Listed Managed Investment (LMI or sometimes called Listed Investment Companies or LICs) coverage universe and, where they existed, premiums have narrowed or turned into discounts. Even LICs which have seen their shares trade at 20%+ premiums to NTA over the past few years, such as WAM Research Limited (ASX:WAX) and WAM Capital Limited (ASX:WAM), have seen their premiums to NTA contract to the smallest levels in many years.

Discounts can persist

This waxing and waning of premiums and discounts has been part and parcel of LIC investing for many years. This can provide opportunities for investors to buy at a discount but also make it more expensive for investors to access quality LICs trading at premiums. WAX and WAM have traded at persistent premiums for many years and those looking to buy into the shares at NTA, or even better a discount, were left in waiting.

Other names have traded at persistent discounts for many years with no end in sight despite, in some cases, solid underlying portfolio performance. The existence of these persistent discounts has led to corporate activity in the LMI sector with takeovers and mergers and more recently the windup of LIC’s such as 8IP Emerging Companies (ASX:8EC). We have also seen the restructure from a LIC to an active ETF vehicle in the case of Monash Absolute Investment Company (ASX:MA1).

Price management mechanisms

Despite the launch of on market and off market buybacks to try and control and narrow persistent discounts, we have not yet seen the introduction of explicit discount control mechanisms in the Australian market. These mechanisms are relatively commonplace in the UK Investment Trust (IT) space which is equivalent to the LIC space here in Australia.

A standard example would be that when a company’s shares trade at for example a greater than 10% discount to its NTA, this immediately triggers an on-market buyback by the company. Similarly, if the shares trade at a greater than 10% premium to its NTA the company would issue shares into the market at NTA. The logic behind this strategy is that as the discount control mechanism is clearly articulated it helps to keep the share price trading around its NTA as there is a clearly defined mechanism and course of action to be followed in case the share price moves well above or below the NTA. The band around which the share price can deviate from the NTA before the mechanisms are activated are set by the board and can be as tight or as loose as deemed fit given the underlying assets in the company.

While discount control mechanisms are not the panacea for persistent premiums and discounts, evidence from the UK market suggests they can help reduce large divergences from NTA and allow investors to trade in and out closer to NTA the majority of the time.

Many Australian LICs do have the ability to use buybacks as part of their capital management and a number of buybacks are currently in operation. Despite this, many continue to trade at large discounts with the buybacks often ineffective. Continued buyback of securities also leads to a reduction in fund size and may not be beneficial to LICs that are already subscale.

With the AGM season fast approaching for the majority of LICs in October and November, the issue of persistent discounts, along with potential strategies for addressing the discounts, is something that LIC shareholders can raise with boards at the AGM.

We expect further consolidation in the sector and other forms of corporate action designed to address both the size and persistence of discounts.

For further updates on LICs, including new issues, see the latest IIR Report for September 2019 here.

 

Peter Rae is Supervisory Analyst at Independent Investment Research. This article is general information and does not consider the circumstances of any individual.

 

  •   11 September 2019
  • 3
  •      
  •   

RELATED ARTICLES

How can the worst feature of LICs also be the best?

Why LIC discount harvesting is a buy-and-hold decision

LIC discounts widening with the market sell-off

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Latest Updates

Interviews

AFIC on the speculative ASX boom, opportunities, and LIC discounts

In an interview with Firstlinks, CEO Mark Freeman discusses how speculative ASX stocks have crushed blue chips this year, companies he likes now, and why he’s confident AFIC’s NTA discount will reverse.

Investment strategies

Solving the Australian equities conundrum

The ASX's performance this year has again highlighted a persistent riddle facing investors – how to approach an index reliant on a few sectors and handful of stocks. Here are some ideas on how to build a durable portfolio.

Retirement

Regulators warn super funds to lift retirement focus

Despite three years of the retirement income covenant, regulators warn a widening gap between leading and lagging super funds, with weak member insights and patchy outcomes measurement threatening retirees’ financial futures.

Shares

Australian equities: a tale of two markets

From soaring government deficits to the rise of network giants, equity markets are marked by persistent imbalance and rapid structural change. In this environment, opportunity favours those willing to look beyond the obvious.

Investment strategies

Dotcom on steroids Part II

OpenAI’s business appears commoditized and the model is not sustainable in the long run. If markets catch on, the company could face higher borrowing costs, or worse, and that would have major spillover effects.

Investment strategies

AI’s debt binge draws European telco parallels

‘Hyperscalers’ including Google, Meta and Microsoft are fuelling an unprecedented surge in equity and debt issuance to bankroll massive AI-driven capital expenditure. History shows this isn't without risk.

Investment strategies

Leveraged single stock ETFs don't work as advertised

Leveraged ETFs seek to deliver some multiple of an underlying index or reference asset’s return over a day. Yet, they aren’t even delivering the target return on an average day as they’re meant to do.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.