Listed Investment Companies (LICs) like AMCIL are often referred to as trading at either a 'discount' or 'premium' to their Net Tangible Assets (NTA). In the current environment of robust inflation, heightened interest rates, and investor uncertainty, several ASX-listed LICs are currently trading at discounts.
Understanding discount or premium to NTA
Whether an LIC is trading at a premium or discount refers to its share price relative to its Net Tangible Assets per share. The NTA is the total value of the portfolio divided by the number of shares issued. If an LIC has a portfolio of $100 with 100 shares in circulation, the NTA per share is $1.
The NTA however doesn’t always align with the market price of shares. The share price can be either higher or lower than the NTA which is when we refer to the stock as either a premium or a discount. If the share price is $1.05 (i.e. higher than the NTA of $1) then it is said to be trading at a premium. Conversely, if the price falls below the NTA per share to $0.95 for example, the stock is said to be trading at a discount.
Established funds with a long-term track record of strong performance can often trade at a premium, whereas newer funds lacking an established performance history may trade at discount.
This dynamic is not fixed though, and the times when a fund trades at a premium or discount will fluctuate. The share price is influenced by factors such as investor sentiment, market cycles and the supply and demand for shares.
Share price is just one of many considerations
Regardless of whether an LIC is trading at a premium or discount, investors should consider factors beyond the share price. This includes fund performance over time, management expenses imposed by the portfolio manager, consistency of dividends, and the size of the fund.
Investors should consider the track record of a fund and any associated management costs. An LIC with a strong performance record and low fees makes for an attractive investment and helps drive awareness and demand for shares.
Many LIC investors seek fully franked dividends, particularly SMSF investors aiming for income in retirement. LICs with stable or growing fully franked dividends often trade at a premium.
Conversely, LICs with variable dividends or no dividends can experience greater fluctuations between share prices and NTA, resulting in a persistent discount. An LIC trading at a persistent discount may be because of market concerns about the manager’s performance, the LIC’s portfolio, or an inconsistent dividend record.
Regardless of trading status, AMCIL has a track record of providing attractive income for investors over the long term. Long-standing LICs often have profit and franking credit reserves that can be utilised in challenging times. We've been able to draw on these reserves to distribute attractive dividends to our shareholders even when companies are delivering subdued dividends.
Tax can significantly impact investor returns. AMCIL's buy-and-hold approach typically results in a low level of capital gains tax payable, as few positions are sold each year. When AMCIL realises a capital gain, we aim to pass on any LIC credits generated by these gains as part of the dividend, providing shareholders with the opportunity for potential tax deductions.
Focus on the long-term
Our share price relative to NTA per share often correlates with the current state of the market, including the outlook for income across companies, the level of interest rates, and investor sentiment toward risk.
Rather than a short-term focus on discounts and premiums, we see more value in considering factors contributing to the long-term performance of an LIC. Share price relative to NTA is a relevant consideration when looking for the right time to buy, but it is not the only consideration.
Whether we trade at a premium or a discount, we remain assured of the quality of the companies within our portfolio, and we are well-placed to navigate ongoing market uncertainty.