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.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

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.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

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.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

Investment strategies

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.

Property

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.

Investment strategies

Dumb money triumphant

One sign of today's speculative market froth is that retail investors are winning, and winning big. It bears remarkable similarities to 1929 and 1999, and this story may not have a happy ending either.

Retirement

Can the sequence of investment returns ruin retirement?

Retirement outcomes aren’t just about average returns. The sequence of returns, good or bad, can dramatically shape how long super lasts. Understanding sequencing risk is key to managing longevity risk.

Strategy

How AI is changing search and what it means for Google

The use of generative AI in search is on the rise and has profound implications for search engines like Google, as well as for companies that rely on clicks to make sales.

Survey: Getting to know you, and your thoughts on Firstlinks

We’d love to get to know more about our readers, hear your thoughts on Firstlinks and see how we can make it better for you. Please complete this short survey, and have your say.

Investment strategies

A framework for understanding the AI investment boom

Technological leaps - from air travel to computing - has enriched society but squeezed margins. As AI accelerates, investors must separate progress from profitability to avoid repeating past mistakes.

Economy

The mystery behind modern spending choices

Today’s consumers are walking contradictions - craving simplicity in an age of abundance, privacy in a public world. These tensions tell a bigger story about what people truly value and why.

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.