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Making LICs accountable to their shareholders

Paul Rickard
Thursday, December 15, 2016

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By Paul Rickard

One of the bizarre Australian Securities Exchange (ASX) rules is that listed investment companies (LICs) such as Argo, AFIC, Milton Corporation or WAM Capital still have 14 calendar days after the end of the month to tell their shareholders what their net tangible asset backing is.

Net tangible assets, or NTA, is the industry’s standard measure of what each share in the listed investment company would be worth if all the assets of the LIC were sold at market and the proceeds returned to shareholders. As LICs typically only invest in marketable assets like other company shares, the price that an investor would buy shares in the LIC on the ASX should, theoretically, be the same as the LIC’s NTA.

However, because the market to buy or sell shares on the ASX in a LIC is real rather than theoretical - it is what a willing buyer is prepared to pay meeting what a willing seller is prepared to receive - the price that LIC shares trade at can sometimes be at a material premium, or discount, to the NTA. For example, if the NTA is $2.00 and the shares are trading at $2.10, then they are said to trade at a premium. Conversely, if they trade at $1.90, they are trading at a discount.

Keeping the market and investors fully informed about the NTA helps to minimize the premium or discount.

There are other reasons for NTAs and trading prices getting out of whack. The graph below from Argo (ASX:ARG), one of the major broad-based LICs with assets of $5.0bn, illustrates the pattern over the long term. It suggests that market cycles play a big part. Premiums of up to 15% have prevailed in the latter stages of strong bull markets, while discounts have tended to occur in the depths of bear markets. 

Argo (ARG) Premium or Discount to NTA

A more recent phenomenon is that premium/discounts tend to correlate with investment performance. Premiums are paid for LICs that are exceeding their investment targets, while underperforming LICs are traded at a discount.

While this is not entirely irrational behavior on behalf of investors, LICs are investing in marketable securities and are not transforming or improving the assets. There is no “value add” to the asset. To be fair to both the buyer and seller of the LIC, the traded price should be as close as possible to the NTA.

Why aren’t LICs reporting more frequently? 

Well, there is no reason except that the ASX rule says that they have 14 days to report. And it is not a question of technical difficulty, because one LIC, Perpetual Investment Company, is already doing this daily, while more than 10 LICs are doing it weekly. Moreover, for quoted managed funds, the new investment vehicle that will arguably pose a big threat to the LIC model, daily and intraday NTAs are being provided. Funds like Magellan Global Equities (ASX:MGE), which is an actively managed quoted ASX fund that is open-ended, provides in real time an indicative NTA and publishes this on its website. 

The good, the bad and the ugly

So, let’s name and shame the LICs (minimum $100m). We will look at the calendar month just completed, November 2016, and the day in December they reported their November NTA to the market via the ASX.

Firstly, the good.

The not so good (bad).

And finally, the ugly.

* Had not reported as at 2.00pm on 14 December

ASX must change the rules

The 14 day calendar rule is way behind the times. The ASX should pull this back to a maximum of five days. Next, LICs should be required to report weekly.

If the ASX feels a little bolder and really wants to promote a transparent market, it would make a single leap and require all LICs to report daily - by 4.00pm on the following working day.

Another issue for the LIC market is that IPO investors paying the selling commission that goes to brokers and other financial intermediaries. Sure, this happens in all IPOs, but a case can be made that the investor is purchasing a unique set of assets. Bit different when it is just marketable securities. But this is a story for another day.

Published: Thursday, December 15, 2016

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