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

Australian stocks will crush housing over the next decade, 2025 edition

Two years ago, I wrote an article suggesting that the odds favoured ASX shares easily outperforming residential property over the next decade. Here’s an update on where things stand today.

Australia's retirement system works brilliantly for some - but not all

The superannuation system has succeeded brilliantly at what it was designed to do: accumulate wealth during working lives. The next challenge is meeting members’ diverse needs in retirement. 

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

The 3 biggest residential property myths

I am a professional real estate investor who hears a lot of opinions rather than facts from so-called experts on the topic of property. Here are the largest myths when it comes to Australia’s biggest asset class.

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 close.

Latest Updates

Superannuation

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Investment strategies

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

Infrastructure

How many hospitals will an extra 1 million people need?

We're about to add another million people to cities like Brisbane, Sydney, and Melbourne. How many hospitals and other essential infrastructure are needed to cater to a million more people? This breaks down the numbers.

Risk management

Is the world's safest currency actually the riskiest?

The US dollar’s long-standing role as a ‘shock absorber’ during times of market stress is showing cracks. The ‘Liberation Day’ sell-off was a timely reminder of this, and here's what investors should do about it.

10 things I learned about dementia and care homes from close range

My mother developed dementia before eventually dying in June last year. She was in three aged care homes before finding the right one. Here is what I learned along the way.

Economics

China's EV and solar backlog and future trade wars

China has flooded the world with electric cars and solar panels to offset the economic drag from a weak domestic property market. How long can this go on, and what are the implications for commodities and Australia?

Investment strategies

Why Elon Musk's pay packet is justified

Tesla copped criticism after its shareholders approved a package allowing Musk to earn up to $1 trillion in stock options. If only Australian businesses were more like Tesla.

Sponsors

Alliances

© 2026 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.