Unless you’re brand new here, you’ll know I invest in listed investment companies (LICs).
If you are new, welcome! But do check out this post on LICs before continuing with today’s article. Otherwise you may not know what the hell I’m talking about!
For regular readers, some of you have decided that including diversified LICs in your portfolio makes sense. Especially for those looking to live off the dividend income from these investments one day.
But a quirk of LICs is, they can trade at a different price to the value of their assets. So this raises questions. How do you know when to buy? Is it okay to pay a premium?
Today, I’ll share the approaches you can take, and also what I do personally. Then you’ll be well equipped to decide what to do in your own investing. OK, let’s get stuck in!
As with most things in the finance world, this all sounds more complicated than it is. And after understanding the basics of it, you can quickly devise a simple plan for dealing with this factor and move on.
Firstly, you buy shares in a LIC just like you would any other company, like Woolies or Commonwealth Bank for example.
And the price of these shares fluctuate depending on many things, including demand and supply from buyers and sellers.
Obviously this is very different from an index fund. An index ETF moves up as the market goes up, and down as the market goes down.
LICs exist to invest in a portfolio of shares for the benefit of shareholders. And the main ones we discuss here on this blog, invest in a broad basket of Aussie shares from a range of sectors.
So the value of their underlying portfolio – known as Net Tangible Assets or NTA – tends to move in a similar fashion to the market, but the share price of those LICs does not. At least not on a daily basis.
Take AFIC for example. Because LIC share prices are dictated by buyers and sellers like every other company, AFIC shares may go up today, even if the market goes down – or vice versa.
Make sense?
Now, let’s say shares in AFIC are trading at $6. Whereas, its underlying portfolio (NTA) may be worth $5.80 per share. This means AFIC is trading at a premium of around 3%.
So does that mean it’s expensive and you shouldn’t buy? Well, it depends. More on that later.
For now, just get comfortable that the price of the LIC moves around separately from the value of its underlying portfolio (NTA).
Every month, the Aussie Stock Exchange (ASX) requires each LIC to report the value of its portfolio to the market, by the 14th of the following month.
Here’s an example of the January statement from AFIC, disclosing its portfolio value or NTA, as of 31 December.
Handily, this statement shows us the current top holdings, portfolio breakdown by sector, and even the premium/discount that AFIC shares have traded previously.
Note – not all LICs share the same detail. Others, like Milton show the dividend history but not the premium/discount information.
Of course, the market has moved in the 3 weeks since that statement, as it does. This means the underlying value of AFIC’s portfolio has moved too.
So we need to take it a step further if we really want to get a clearer picture of what our dollars are buying. But first…
On that portfolio statement, there are two numbers you’ll see. One is pre-tax NTA. The other is post-tax NTA.
Pre-tax NTA is simply the current net value of each share after the company has paid income tax and any capital gains tax owing from investments it has sold.
Post-tax NTA is the value of each share if the company liquidated its entirely portfolio today and paid all capital gains tax owing and then gave the money back to shareholders. Effectively, what’s leftover if the LIC sold everything and closed down forever.
For our purposes, pre-tax NTA is what we want to look at. The current ongoing value of the portfolio. Why would I care what Argo is worth if it closed down today?
A large and conservatively managed 70+ year old investment company with tens of thousands of shareholders and no debt isn’t going to sell everything and shut up shop. Ain’t gonna happen.
OK, back to estimating NTA during the month…
For simplicity, let’s say AFIC is trading at $6 per share. And the last monthly statement showed AFIC’s portfolio, or NTA, was $6 per share.
But given the delay in reporting, it’s now 3 weeks later. So we need to look at where the market went in that time, to see if AFIC is trading at a premium or a discount.
We’ll say the market went up by 2% over that time. Given AFIC’s portfolio is very similar to the ASX 200 index, we can roughly assume that its portfolio also increased by 2%. This would mean NTA increased from $6, to $6.12.
With shares trading at $6, AFIC is then trading at a 2% discount. See how that works?
Simply put – take the end of month NTA, and adjust for where the market has gone since then, to get a decent estimate of current NTA.
Also, once shares hit the ‘ex-dividend’ date (when you’re no longer entitled to the upcoming dividend), shares will fall by roughly the amount of the dividend.
Well, one easy way is to check where the market was on the last day of the month and where it is now.
Your broker likely has data on this. Or you can simply check this page, which shows the ASX200 price history.
Take the current ASX200 price and divide by the end of month price. For example, as I sit here on Thursday January 19, I’d do this…
5847 / 5654 = 1.034
This means the market has gone up by 3.4% since December 31. Now we take the latest pre-tax NTA from the company website or portfolio statement, and add 3.4%.
That’s it, the current NTA estimate! Here’s a real life example…
Milton’s website shows end of month NTA was $4.42 on 31 December. With the market up 3.4% since then (as at January 17), this means Milton’s NTA is somewhere around $4.57.
So with shares trading at $4.43, Milton is trading on a discount of around 3%.
Again it all sounds far more complicated than it really is. Not to mention it’s all entirely optional. More on that soon.
But thanks to some nifty work from fellow blogger Pat the Shuffler, there’s an effortless way (my favourite) to do this.
Enter, the NTA Premium/Discount Estimator.
Pat has created a Google Doc which is updated monthly with official figures, but also sucks in the daily price movements as they’re happening (delayed 20 mins).
So with a quick peek, anyone can quickly see whether their chosen LIC is trading at a premium or a discount. The Estimator includes AFIC, Argo, Milton and BKI.
Big thanks to Pat for creating this and I’m sure it’ll be used and loved by many, for years to come! You can find it on his website, or also the Google Sheet here.
Of course, these numbers are only a best guess. But it’s a much easier way of guessing!
And another good thing is, the numbers are adjusted on the ex-dividend date (when you’re not entitled to the upcoming dividend).
As alluded to earlier, these small discrepancies exist for many reasons.
One important thing to note, overwhelmingly, LICs are owned by retail investors, not so much by institutions or professional investors.
Since retail investors often have a different set of criteria for buying shares, demand for those shares is often based on popularity with retail investors.
This can probably be seen as an imperfect corner of the market, where there’s little, if any interest in buying and selling to profit from a small spread or opportunity until it’s gone. Hence, these LICs do not trade exactly in line with their NTA.
Some LICs trade at a premium for long periods of time, others at a discount.
And many will dance from premium to discount and back, depending on lots of factors – most of which are unpredictable.
— Solid track record of performance over a decent time period (5+ years).
— High level of popularity and shareholder following, often due to size, good communication with shareholders and very long history (think AFIC & Argo).
— Proven to be a reliable dividend payer, or offers higher than average fully franked yield.
— Retail investors are simply topping up their holdings and don’t track NTA closely (or at all).
— Deemed to be a very safe and stable investment option. Perceived higher quality.
The opposite of above…
— Poor level of performance over recent or long term history.
— Unreliable dividends or low level of yield.
— Management have proven to be less trustworthy or not always acted in shareholders best interest.
— Simply less popular, less liquid, or deemed to be higher risk investment option. Perceived lower quality.
A fair chunk of this factor comes down to popularity.
For example, at the time of writing the most popular LICs like Argo & AFIC have tended to, on average, trade at a small premium much of the time (+1% to +3%).
Whereas the less followed LICs like AUI and Whitefield, tend to trade at a discount much of the time. Because of the real or perceived reasons given above.
Some of the better performing small/mid cap LICs which pay high dividends can often trade at very large premiums of over 20%. Because many retail investors are buying based on the expectation of getting a high and reliable yield.
Personally, I’ve paid large premiums in the past for high yielding LICs like this. But I’m just no longer comfortable doing that. There’s no need. Often if you’re patient the extreme premium will come back down. Or you can simply find an alternative LIC to invest in!
Another reason for the premium/discount factor is simply because LICs don’t precisely follow the market. Their share prices tend to move in a slower fashion than the market does.
So if the market is rising, LICs share prices tend to rise slower and often trade at a discount. And in a falling market, they tend to fall slower so often trade at a premium.
Many shareholders probably don’t worry about NTA too much, so it takes a while for the market moves to be reflected in the share price of these LICs.
Other than the above, your guess is as good as mine! There’s a realm of possibilities as to ‘why’.
Unless you survey everyone, you’re not going to know exactly why they bought or sold at the price they did.
So now you know what happens and why it occurs. The next logical thing to wonder is, how do you approach it when building a portfolio?
The way I see it, you have a few options…
The first option, of course, is to not even look. Just forget about it and go do something else!
Although it sounds reckless, experienced investors (like Peter Thornhill) realise that LIC premiums and discounts tend to even out over time. See exactly what Peter says about this approach in my interview with him.
If we’re buying shares for the next 30+ years, we’ll probably buy at a premium and also at a discount, many times over. So does it really matter?
Here’s an example…
Let’s say over 30 years you achieve a return of roughly 8% per annum. Your investment will grow 10 times in value.
To be exact: $100 will become $1000, at a return of 7.98% per annum.
If you pay a premium of 2% for those shares – $102 instead of $100 – and again end up with $1000, your return is 7.91% per annum.
So you’ve just multiplied your money by 10x! Hopefully you won’t be freaking out about the tiny fraction you missed out on!
If this relaxed approach sounds best to you, how do you apply it?
Choose which holdings you’d like to have in your portfolio. Then put them in order (any order) and buy one each month. Simply take it in turns, for an easy set-and-forget accumulation strategy.
Next, you can follow the approach above, but mildly optimise.
Realise you’ll still pay a premium sometimes and that it probably won’t matter that much over the long term. But being mindful of this factor and making a rough guesstimate to make sure you don’t pay way too much.
You can use the manual approach to figure out the premium/discount, or use Pat’s LIC Estimator.
Again, choose which LICs you want in your portfolio. Then buy the LIC trading at the largest discount first. The following month, you’d simply buy the next cheapest one on the list. And so on.
You’ll probably still pay a premium sometimes as you work down your list. But this approach is still pretty relaxed and easy to follow.
For the classic over-thinkers and over-analysers. You can watch the premiums/discounts relentlessly, making sure you never pay more than NTA value, and always buy the LIC trading at the largest discount.
Your spreadsheet or Pat’s tool will be your best friend. However, there’s still no guarantees your performance will be much better than the comatose investors taking Option #1.
It may help a fraction over the long term, looking back at the calculation above. But one thing’s certain, you’ll probably be spending more time, effort and worry on it.
Here’s the issue for the discount chasers…
You’ll likely only ever buy LICs which regularly trade at a discount. And those LICs may be trading at a discount for good reasons.
So you may not be able to build your portfolio in the way you’d hoped. You’ll simply end up buying Whitefield every month because it appears the cheapest, when you’d really prefer to buy Argo or AFIC, for example.
This approach creates the most anxiety and can cause investing to become less enjoyable. All this effort for no certain reward!
Do you really think that’s the best way to go about investing and building a portfolio?
Now I know some people won’t want to pay a premium out of principle. That’s OK, I get that. But most people are better off doing other things in life, than agonising over whether they’re paying a 1% premium or which LIC they should buy this time vs next time.
Take a step back for a minute. And recognise we can probably use our time and energy in a more productive way. So we need to let go of that control freak inside us and approach this more casually. You’ll enjoy investing a whole lot more, trust me.
And in case you haven’t heard, Perfection is Our Enemy.
If you’ve got a headache right now, then I’ve got a solution for you…
Buy the index! That’s right. Simply buy shares in an Aussie index fund (for example, Vanguard’s fund VAS) and you’ll never have to think about LIC premiums and discounts again.
As much as I like LICs, I think some people are better off with this approach. One big reason is, this way they won’t worry about what to buy and then second-guess themselves.
Buying the index will make the investing process a whole lot easier. Your returns will be similar over time, possibly higher. Dividends will be similar, just fluctuate more.
So if these things keep you up at night, please feel free to say “stuff this” and go for an index fund. You’ve gotta do what feels right for you.
Lastly, we can take a hybrid approach to LICs and indexing, by combining them!
Before you switch off, thinking I’ve just made this more complex, hear me out.
These two investment vehicles aren’t opposites. Actually, they’re quite similar.
Both are a low cost way of owning a large portfolio of Aussie shares. And both serve our purpose of providing a good level of income which grows over time. LICs are just a more targeted way to achieve that goal since it’s their primary objective.
The index has no such goal. But by tracking the performance of the top 300 companies in Australia, as those companies earnings grow and they pay larger dividends, the index will naturally pay out higher dividends as a result.
So Option #5 is simply this: Buy your chosen LICs when they’re trading at a discount or close to their NTA. And if they’re trading at a premium you don’t want to pay (say over 2-3%), then buy the index.
Honestly, I used to think about this stuff a lot at the start. But after realising it was making the whole process of investing less enjoyable, I took a step back.
And I started to see for the effort spent over-analysing LIC premiums and discounts, the long term result wasn’t likely to be much different.
So I don’t mind paying a small premium to buy the holding I really want. This helps me keep balance in the portfolio as it grows. Otherwise I’ll end up with a weird and lopsided looking portfolio, that isn’t what I want.
My attitude is that of Option #2 – the Mild Optimiser.
But now that I’ve recently added an index fund (VAS) to my portfolio, I’m mostly in the Option #5 camp.
Pretty simple. Pretty relaxed. And only takes an extra minute or two, for each purchase.
Like many things, this can be as simple or as complicated as you like!
Hopefully you’ve now got a good handle on LIC premiums and discounts, why they occur, and which approach suits you best when building your portfolio.
Remember, the point isn’t to buy at a discount and sell it later at a premium. That’s a trader mentality. The benefit is simply buying a diversified basket of shares at a discount to their market value. Thereby getting the long term income stream from those shares at a slightly cheaper price.
Now you’re probably wondering, what does my portfolio look like? Why have I added the index to my portfolio? And how do you decide what to invest in each holding?
Well, each of these topics will be covered very soon in future blog posts – so stay tuned!
However you choose to approach LIC premiums and discounts, and the rest of your investing, there’s one thing I’ve learned – lean towards simplicity.
Instead, spend more time focusing on bigger impact stuff. Like increasing your savings rate. Building an enjoyable low-cost lifestyle. Or just enjoying your home life, family and hobbies.
Whatever you do, just keep investing and focus on the long term! Which approach are you taking? Let me know in the comments.
Why deliberate spending is my favourite money management style. What it really means and how you can use it as your situation and priorities change over time.
My thoughts on ‘The Great Taking’. An idea that the masses will lose untold amounts of wealth in the next financial crash, due to a deliberate plan by mysterious figures.
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Great article! Morningstar also produces a free valuation/price report on all LICs on the ASX for free download on their website
Cheers Glen. I wasn’t aware of that – is it updated daily? Pat’s estimator is essentially live pricing which is pretty neat.
That’s indeed very cool! Tho probably a little much for a long term investor. Here’s the link which makes for a great shopping list 🙂
https://www.morningstar.com.au/LICs/MonthlyReports
Well you don’t look at it daily of course – the point is it’s there if you want to check it before buying and it’s fully updated. Those Morningstar reports are very out of date – they’re still at end of November!
Hi there
Sorry if I overlooked this info, but does owning multiple LICs mean that you are essentially overlapping/buying the same ASX businesses?
I’m trying to learn why people would own ARGO, AFIC etc when they buying similar companies. What is the benefit to that?
Would it be better to just buy 1 LIC?
Hey Ben. Yes there will be a fair amount of overlap, but not entirely.
There will be some different companies held by each. More opportunity to purchase at a discount to NTA, or participate in Share Purchase Plans which are also usually at a small discount and brokerage free. It also reduces manager risk in case something funny got into the water at Argo for example and they changed strategy or started making repeated poor portfolio decisions, which is extremely unlikely but still possible.
I wouldn’t say it’s better to buy 1 LIC, but if that’s what you’d prefer then that’s probably fine.
Another great post. Appreciate it. Cheers.
Thanks for reading Steven!
Hi SMA
Useful post for those interested in LICs. It’s a bit of fate, we published pieces on LICs the same day! I also covered Pat’s NAV calculator concept briefly in there.
One thing, I was not sure I understood the maths behind your example correctly. The $2 loss is gone, forever, and I couldn’t replicate plugging in those numbers a $100 initial investment for 30 years. I might have missed something in assumptions about timing though. More seriously, I think the other challenge with this example is that FI typically means large ongoing investments over time, and it is that repeated premium paid over any significant period that would really harm returns. The way I think about it is if I have paid $102 for an asset producing only the value of $100, I’ve suffered a one year return hit of 2%, or around a third of the equity premium. It’s true that compounding a smooth 8% out to 30 years makes any final result look okay. But it would not erase the large opportunity costs of any sustained buying at premium.
As you know, I lean toward devoting no time to thinking about LIC NAV premiums.
Hey mate, I did see that haha, bit of a coincidence. Good article by the way.
You’re spot on that it’s real extra money paid that was the choice of the investor. The calculator used was a simple CAGR calculator like this one – plugging in $100 turning into $1000 over 30 years, then $102 turning into $1000 over 30 years – that’s all.
My point was more general in the sense that if choosing the ‘no looking’ option, you’ll very likely pay a premium sometimes but other times you’ll pay below NTA because these things fluctuate, so over time it has an averaging effect.
I think I get your point about equity premium – but that’s assuming the premium to NTA disappeared within that 12 months, which is entirely possible, but also means the following year’s purchase the investor pays NTA value. If the LIC stayed at a 2% premium, that investor would have receieved the same level of return. So it works both ways, and no doubt paying a premium to NTA for every purchase over a long period of time would make a large difference.
I mostly put in the ‘no looking’ option because I know some shareholders just don’t care – they’re happy with their holdings and the income, and simply keep topping up. So it’s in there as an option, not necessarily as a recommendation 🙂
Thanks for the explanation, that makes sense now.
I completely agree with your last message. I really worry about people getting interested enough in investing, coming to the trigger point, and then hearing they have one more thing to do, estimate a NTA/NAV at each investment point and worry about whether they are paying a premium. That just strikes me a hurdle likely to lead to ‘cart abandonment’ in e-commerce terms. 🙂
Hey Dave, first time commenting on your blog though have been following for sometime. This post has come at the right time for us. We originally started investing in Vanguard’s Australian Index Fund (Retail Managed) back in 2008 & over the past 12 months thanks to your blog have also invested in BKI, ARG & AFI via our Family Trust- we have tax losses in there from property adventures. Our portfolio is essentially 50/50 (Index/LIC’s). We have been building some $$$$ in our SelfWealth account though have not pulled the trigger recently due to the LIC premiums- OPTION #5 feels right & balanced to me so we will be adding VAS in the not too distant future. Thanks SMA!!
Appreciate you commenting FF 🙂
Glad it helped you decide on an option going forward that feels right for you. Makes sense to me. Thanks for reading.
Nice article again. I like the general flow from information, to practice with a reflection on your own journey and evolution through it.
One approach which I have been working my way through which uses elements that you have outlined also incorporates a dollar cost averaging element. Once you have decided on your portfolio structure and weighting, the next purchase factors in premium/discount, whether underweight and then which purchase will lower your average unit price. Assuming that the price for a given LIC has not fallen due to factors which may change your initial investment plan. So hypothetically – buy AFIC (assuming no fundamental change) if it is a bit underweight and available for $6.00 where your average cost is $6.20 instead of say MLT where again you are a bit underweight, but available for $4.50 and your average cost is currently $4.40. I’m not sure the validity of such an additional tool nor if it matters if you are just chasing dividends – but assuming dividends remain the same or increase you are increasing your yields by doing this.
Another question which may be addressed in your next post – why VAS and not A200 as you index fund with a lower MER? Is it due to the lower dividend flow and funds under management in its early days?
Thanks SJ!
Definitely a journey – I’m not a guy who has everything figured out. We all keep learning (at least we should) 🙂
I don’t really agree with that approach – that’s simply anchoring against previous prices, not that great an idea. I get that it’s cheaper, but we should look at what we’re buying today with the information presented, not compare to what we’ve paid previously. Especially since the NTA comes into it.
Maybe what you’re getting at is if you have exactly $10k in each and you simply buy whichever one has performed the worst since your last purchase – this is likely to mean you’ll end up buying the cheapest one (NTA wise) and is a way of rebalancing also. That could work, but it would prob be messy.
I like VAS better since it’s the top 300 vs top 200. It’s a small amount in the extra 100 stocks, but if I’m going to index I want to index the entire market. Also I hope (and expect) that our market will broaden out over time and we’ll have better diversification and thinking a few decades ahead I’d much rather own the top 300 than the top 200. Personal choice I guess. Also I trust the Vanguard brand more – it’s larger, the index is more proven, they’ve proven a good index tracker and is more customer focused (less profit motivated). A smaller reason is Betashares has lots of products that seem gimmicky and rather useless or trader focused which just rubs me the wrong way. Using A200 is a perfectly sensible choice – I just prefer VAS.
I want safety, reliability and good dividend income and dont worry too much about paying a Premium to NTA value unless its outrageously expensive. You can get hung up too much on the textbook approach to investing and it gets obsessive for some people. You can have your VAS, AFI, WHF, ARG, BKI, CAM etc and they can all live happily in your portfolio with other stocks and yep you will get crossover in terms of holdings content but its not worth worrying about and trying to correct by over analyzing. Diversifying in different LIC’s holding the same stocks isnt such a bad thing as you never know in this game what might happen to some funds.
ETF’s are no path to El Paradiso either, anyone who bought Betashares HVST which was meant to be the income investors holy grail can tell you that…11% Yield…woo hooo……too good to be true…you bet ya it was and Betashares ETF’s dont guarantee a good nights sleep IMO.
A true story….Went to a AGM for a small LIC I hold and was chatting as you do to a portfolio manager before all the boring stuff started and asked him how big he expected the FUM to grow and why people continued to plow money into AFI, ARG etc even though most of the time they under performed the market or just met expectation at best, he gave me this analogy…. he said if you wanted a watchdog outside your bedroom door and I offered you a fox terrier that barked every time it heard an intruder, was initially cheap to buy, cheap to maintain or gave you you the choice of a expensive German Shepherd, who are costly to feed, expensive to maintain with vet bills, have a shorter lifespan and also barked at intruders who would you choose?.
He said 9/10 people would choose the GS every time……reputation and size win over practicality and cost…..
Thanks for sharing your thoughts Mark.
I think of it in a similar way to you – the stable/reliable of income is an important factor in an investor choosing old LICs. This is where dividend investors and indexers often part ways in mindset and it’s hard to agree on things like volatility, risk etc.
I loathe HVST as a product, I think it’s snake oil.
That analogy is interesting – not sure it matches exactly what we mean here, but I think I get the idea. It probably comes down to the comfort factor. People probably feel more comfortable with a large chunk of money in the hands of AFIC, Argo etc because they’re conservatively managed (don’t buy high PE or speculative stocks) and retirees want that dependable income to live on. Maximum possible performance is usually not top priority.
Hi Dave – so to be clear, you add money to your investments every month regardless of stock price but will choose between LICs or VAS depending on the NTA of your LICs? This is what Firebug does I believe (but he used A200 instead of VAS). Thx
Hey Scott. Yep investing every month regardless of the market. And yes roughly as you’ve described, though I’m not strict about it. Bought Argo at a premium last month for example, but also bought Milton at a discount – so to me that evens out and happy to build my position in both. Month before that I bought VAS because I want to increase my holding in that also. Will go into portfolio building soon but it’s not at all complex. Hope that helps.
Thanks for that. I must have missed it but why did you choose VAS over the cheaper A200? Also, have you considered only buying into LICs when the market “dips” to ether match or lower your cost base? I realise that by tipping cash in every month, you are dollar cost averaging in (just like superannuation works) but the market does dip every 3-6 months it seems.
See my reply to SJ regarding A200 – it’s a fine choice, I just prefer VAS.
I don’t play the market timing game, regardless of whether it appears to repeat and seems predictable or not. I focus on what I can control – the amount I put into the market. Regular investing is the only thing that makes sense to me. Others are free to do what makes sense to them of course!
Hi SMA
Thanks again for a very helpful blog
I own Milton and I guess that the NTA is also affected by the number of people who take their dividends as extra shares
Wazza
Hey Warren, thanks a lot!
The NTA stays pretty the same even when people reinvest the dividends (provided there’s no discount offered), because instead of paying out the cash as dividends, the company keeps the cash and instead issues new shares to you. So each share is still worth the same amount afterwards. Hope that makes sense 🙂
Thanks for the mention Dave!
A good straightforward approach to dealing with NTA premiums and discounts. Like you though, I find myself caring less and less, I quickly check my discount estimator and as long as it is within a few percent I just go with it.
Cheers Pat! Yep same here, and thanks for the calc!
By the way, you didn’t think it may be handy to mention the effect of the ex dividend date on NTA? Too much info?
Oh yeah that’s a fair point. The post was probably long-winded enough as it is 🙂 But maybe I’ll slot it in there today – good pickup.
Those that use the Estimator will have it factored in and the ones that don’t bother looking probably don’t care that much.
Hi SMA
What was your reasoning for buying VAS? Is this just a diversification play, as the LIC’S you invest in are similarly tilted as VAS so returns won’t differ greatly and you get fully franked Dividends with LIC’s, smoother dividends and no lumpy distributions etc? Therefore greater income to support retirement etc as you mentioned.
Thanks
John
Hi John. Opportunity to buy cheaper as the market falls – few months back bought VAS when the market was down almost 10% and the likes of AFIC had barely moved. Extra diversification – the idea of owning every stock on the ASX grew on me. But overall still prefer the income focus of the LICs.
Thanks for the clarification SMA.
Makes sense.
Appreciate the blogs!
Hi, thought worth mentioning some of by best long term LICs are DJW and WAM, both seem to allways trade at premiums…
Thanks for all your efforts in educating us all.
Thanks for sharing David, and glad you enjoy the blog!
Most of Wilson’s LIC’s trade at a premium, the man himself said he wouldnt buy his own stocks as they are too expensive. You are paying extra for the reputation and popularity as well as the very decent yields they deliver. Geoff Wilson is the godfather of LIC’s in Australia and no one self promotes or markets his stocks better than him…..be interesting if and when he does retire, what happens to the values of his stocks.
He definitely has a large group of followers who are silver haired and dividend hungry – I’ve been to a couple presentations in the past. Haha yes his promotion is top notch – the performance reporting leaves a lot to be desired though. The track record for WAM is decent after all fees and costs, they should just show that, for the sake of transparency.
Geoff Wilson constantly buys shares in his LICs according to the asx announcements
I think you guys are both right. I’ve seen Wilson sell WAX recently and by WLE and WGB – he may still participate in reinvestment plans so automatically top up, I’m not sure. But he does say not to buy his funds at a premium and it appears as though he makes an effort to buy funds trading around NTA like the ones I mentioned.
Today, AFI announced that it will pay its usual 10c per share final dividend, PLUS an extra 8c per share special dividend! ARG will probably also include a special dividend when it reports in a couple of weeks.
In the years when I had a rental property, no tenant ever paid me a special rent payment.
Hey Robert, yeah I did see that – not too bad at all! Let’s see if the others follow suit 🙂
Hahaha I like the rental comparison!
Keep up the great work young Skywalker, the evil dark side is gathering strength.
We may need to call on Master Yoda Thornhill in preparation for the upcoming battle. May the force be with the almighty dividend warriors.
Hahaha! Maybe we’re just a group of irrational outcasts, doomed to continue with our sub-optimal and misguided ways 😉
I was planning on following option 5, buy AFI if price is close to NTA, otherwise buy VAS. However, it seems AFI is always trading at a premium and I am a little bit over invested in VAS atm. Main reason for picking AFI is DSSP feature. I think going forward I’ll simply buy AFI each month regardless if trading a premium or discount as per option 1. I have considered Whitefield too, but the fee is just too high for my liking.
Thanks for sharing your approach Gene!
AFIC does seem to be trading at a premium more often than not. Can’t tell if that will continue though.
I hear you on the Whitefield fee, but the argument could be made that it trades at a large discount because of the fee, which makes up for it in a way. Say an investor is buying at a 10% discount, he/she’s getting an extra 0.4% dividend yield compared to the underlying portfolio, which is locked in on purchase and definitely dilutes the higher fee.
Just another way to look at it, not trying to sway you either way. I think all 3 options are fine 🙂
Hmm, interesting way of looking at it. From that perspective I suppose WHF could be a viable option. I’ll have to look into it a bit more then. Thanks for pointing this out to me. // I do have a tendency to overthink stuff, always trying to optimize it. Should probably just focus on increasing my saving rate as you suggested 🙂
Keep in mind that adds an extra holding to your portfolio so adds a tiny bit of extra admin/complexity/thinking. Depends how simple you want to keep it. But yes, savings rate is by far the most important thing to put effort into! 🙂
I really liked this post Dave, fantastic explanation of LICs and easy to follow and understand. I do love a stock trading at a big discount to NTA (usually with plenty of associated risk), but I suspect LICs are never going to provide such opportunities…
Nevertheless, you keep me very interested in this style of investing, so who knows, one day LICs might just make an appearance at FFF 🙂
Cheers, Frankie
Awesome, glad you liked it – thanks Frankie!
The old LICs have traded at big discounts of 10% or so in the past – I think in the 2011 bear market and in the mid 2000s when the market was flying also. Last 5-7 yrs has seen most fluctuate between +5% to -5%. If franking refunds get axed the LIC structure becomes a bit less efficient for low tax bracket investors (retirees) so they may fall out of favour and trade at heavy discounts to compensate. Have to wait and see on that one 🙂
Hi,
I’ve got a question about pre and post-tax NTAs that has me confused and puzzled:
So currently LSF is trading at around a 15% discount because it has underperformed since listing. More intriguing is the fact that the post-tax NTA is even higher than the pre-tax NTA, I presume because of capital losses made early in the life of the fund.
Is there any benefit for an individual to take advantage of these carried forward losses. I mean it means there won’t be capital gains tax paid in the near future, but as a holder of the LIC, when you sell your investment in the LIC you will end up paying CGT on the uplift in the share price caused by these future capital gains anyway right? So is there any overall benefit? I can’t work it out mathematically. Thanks.
Interesting question Confuzzled! I’m not an expert on this stuff by any means. But I think those tax losses are trapped inside the company and can only be used to offset any tax owing on future profits the LIC makes. I’m not sure there is a way for them to distribute tax losses to investors. For tax purposes, all that matters to you and the ATO is what you bought and sold for.
The benefit I guess is that the LIC can make future gains, pay zero tax and distribute to you, or simply reinvest into new holdings. The NTA will be higher than if they had to pay tax. Downside is they’ve made losses previously, which has already diluted NTA for past shareholders. That’s my guess on how it works, but could be wrong!
I like option 5 too.
We’re just starting out and only have 2 holdings so far, but we chose which one to buy first by the largest discount to NTA at the time. We will continue with that strategy, and buy the index if everything is at a premium, until we have a stake in all the stocks we’re interested in.
I’m guessing that means we’ll eventually end up with a larger stake in BKI and MLT than AFI or ARG as they seem to trade at a discount more regularly, so if it starts to get too out of whack, we’ll buy whichever we’re short of that’s trading at a discount.
I just want to feel like I have some kind of vaguely scientific/process oriented strategy for making the decision, rather than gut feel. Makes me feel smarter, feel like I’m getting a bargain (or beating the system, even though I know I’m not really), and more emotionally detached from the purchase – because the formula told me which one was best to buy at the time. Plus I like having a plan. They plan may need to be tweaked along the way, but that’s ok.
It won’t take much extra time to follow that process, given we’ll probably only buy every 2-3 months.
Thanks again for the great content!