Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 94

Capital management techniques in LICs

In the last five years, the Australian Listed Investment Company (LIC) sector has grown at a rapid pace to reach a market capitalisation of over $26 billion. The last year alone saw 15 new LIC offerings and total capital raised touching $1.5 billion. LICs continue to be a popular investment choice for investors on the hunt for dividends in an environment where other asset classes have been struggling to provide similar levels of yield.

In October 2014, I wrote an article about why LICs trade at premiums or discounts to net tangible assets (NTA). In the last three years, the overall LIC sector discount to NTA has narrowed significantly, driven by many factors, including the increased popularity of LICs following the introduction of the FOFA (Future of Financial Advice) reforms and the proliferation of SMSFs. There still remains a small part of the sector trading at a discount to their NTAs, and as a result, we have seen the number of capital management initiatives increase compared to previous years.

Two key techniques to narrow the discount

1. Share buy backs

Share buy backs have had mixed success rates over recent decades. While the technique has worked quickly and effectively for some in narrowing the discount to NTA, it has not been the case for others who have seen their buy back programmes prolonged with no or little narrowing and leading to eventual abandonment of the initiative.

Focusing on more recent times, given the proliferation of LICs in the last few years, uncovers some examples.

Hunter Hall Global Value (ASX: HHV) announced on 27 November 2014 a share buy-back of up to 10% of issued capital. At the date of the announcement, HHV traded at a 9% discount to NTA and had been trading at a discount for the last few years, averaging 16% in the last three years. Five weeks later, the discount to NTA had narrowed to 4%, despite the fact that the company had not started implementing its buy back mechanism. In this case, announcing the buy back on its own seemed to have the desired effect.

Premium Investors (formerly listed on the ASX under the code PRV), a LIC part of the Treasury Group, traded at a discount of 15-25% for many years. It had various buy backs of up to 10% of stock under way over some years, which didn’t narrow the discount to NTA to the Board’s satisfaction. In August 2012, it announced a buy back of up to 75% of stock, citing the discount to NTA over a prolonged period as the main driver. This particular LIC was sub-scale with around $86 million of funds under management and had a sporadic history of paying dividends. WAM Capital Limited merged with Premium Investors on a NTA for NTA basis in December 2012.

2. Dividend policies

Newer but more established LICs trading at a discount to NTA have been providing shareholders with a formal dividend policy and more forward-looking dividend payment information.

In October 2012, two LICs which are part of Perth-based financial services group Euroz Limited, Westoz Investment Company (ASX: WIC) and Ozgrowth Limited (ASX: OZG), announced the payout of a minimum of 50% of realised profits each year and provided dividend guidance for the following two years. Before the announcement, Westoz was trading at a discount to NTA of 36% and Ozgrowth at 34%. This compares to a much narrower discount at the time of writing of 2% at Westoz and 4% at Ozgrowth.

As mentioned, one of the key drivers of the proliferation of the LIC sector is the chase for fully franked dividends and LICs are now becoming more open in providing dividend policies and guidance, which in my opinion will help narrow the discount to NTA.

Funds may liquidate if discounts persist

In the past decade in Australia, we have seen various LICs either wind up or be taken over in M&A transactions, where the discount to NTA has persisted over protracted time periods. The largest incidence of note was Ellerston GEMS Fund which listed in July 2007. It had a proven track record, a strong investment team, a flexible mandate and raised $600 million in the listing. Just over a year later, and despite a strong outperformance of the fund versus the market during the GFC, the discount to NTA widened to a hefty 24%. The company announced that redemption facilities would be put in place for shareholders to realise NTA over a three-year period and that the LIC would be delisted from the ASX. It delisted in November 2011.

Souls Private Equity Limited was a LIC focused, as the name suggests, on the private equity space. In September 2011, parent company, Soul Pattinson (ASX: SOL), made a takeover bid at NTA for the company, which was trading at a 60% discount to NTA prior to the announcement.

Strong demand for LICs but some discounts persist

Even though we are in a ‘golden decade’ for LICs in Australia, some LICs, particularly the smaller ones, continue to trade at a discount to NTA. More recently issued new LICs which are examples of this include NAOS Emerging Opportunities Company Limited (ASX: NCC), trading at a 12% discount to NTA and Acorn Capital Investment Fund Limited (ASX: ACQ), trading at a 15% discount to NTA at time of writing.

Other factors that we consider to be determinants of trading at a premium or discount to NTA are the liquidity of the stock, the level of marketing by the company or by the contracted investment manager and general levels of shareholder engagement such as direct presentations to shareholders, media exposure and other marketing related activities.

No single method always works

While buy backs have had mixed levels of success in narrowing the discount to NTA, there is no clear evidence that it enhances the share price relative to NTA. In more recent times, some LICs have been providing more dividend guidance and there is evidence to suggest that this has worked for those able to follow this route.

 

Chris Stott is Chief Investment Officer at Wilson Asset Management. His views are general in nature and readers should seek their own professional advice before making any financial decisions. Wilson Asset Management is a major manager of LICs.

 

  •   29 January 2015
  • 3
  •      
  •   

RELATED ARTICLES

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

LIC discounts widening with the market sell-off

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

banner

Most viewed in recent weeks

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

Back to the future - Why indexing CGT is a good idea

A return to indexation of capital gains would be a fairer way to compensate households for the effects of inflation than the current discount. Importantly, it opens the door to future, broader reforms to stop the taxation of inflation.

The investment mistake killing your returns

Retail investors face an increasingly complex product environment, but simplicity may be the most overlooked advantage in building a portfolio you can actually live with.

Latest Updates

Investment strategies

Choose your hedges wisely… and often

A new market regime is exposing the fragility of static hedges. With correlations shifting and safe havens flipping, investors must rethink diversification and adopt more adaptive tools to protect capital.

Investment strategies

Yields take centre stage again

The Australian credit landscape is shifting. Yields are rising, issuance is strong and spreads continue to tighten. Income is re‑emerging as the dominant driver of returns, though pockets of risk may be building beneath the surface.

Investment strategies

The grass is always greener: Rethinking Australian vs global equities

Australia's once‑dominant sharemarket is losing ground as others surge ahead, prompting investors to question home‑bias instincts. Meanwhile, the US market appears attractive. Is it time to revisit your global equity allocation?

Investment strategies

Stop asking if there's a stock market bubble. Ask this instead.

Markets continue to push onwards despite valuations looking stretched by historical standards. Bubble talk is rampant, however investors may be focusing on the wrong thing. The real story sits deeper than the headlines.

Taxation

The GST cannot stop inflation

Raising the GST when inflation jumps sounds clever on paper, until we examine how it may play out in practice. What is pitched as a simple inflation fix can lead to a sharp turn in the wrong direction for prices.

Shares

Why SpaceX is coming to your super fund

SpaceX’s blockbuster debut is grabbing headlines, but the real story for Australian investors is much quieter. Giant listings eventually filter into super funds and ETFs, subtly reshaping portfolios long before most realise.

Taxation

Is the government being honest with us about its business CGT changes?

The government’s assurances on small‑business concessions don’t withstand the scrutiny. Token carve‑outs and a lack of credible rationale for CGT changes may reshape how Australia rewards long‑term value creation. 

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.