just get the NTA up, then everything else takes care of itself IMO !
Here’s an interesting piece - makes sense, if you see an undervalued stock, buy it then sell it when it becomes overvalued is generally a good idea, so why not apply that to your own shares? !
Managing Discounts and Premiums
Over the course of the last 12 months we have seen discounts to NTA on the whole widen in our LMI 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.
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 but also make it difficult for investors to gain access to quality LICs trading at premiums. We note that WAX and WAM, have traded at persistent premiums for many years and those looking to buy into the shares at NTA, or even a discount, have been left in waiting. Similarly, there are other names that 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 lead 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 announced restructure from a LIC to an active ETF vehicle in the case of Monash Absolute Investment Company (ASX:MA1).
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 common place
in the UK Investment Trust (IT) space which is equivalent to the listed investment company space here in Australia. A standard example would be that when a company’s share trades 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 great 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 mechanism are not the panacea for persistent premiums and discounts, evidence from the UK market would suggest they can help alleviate such large divergences from NTA and allow investors to trade in and out closer to NTA the majority of the time. We note that many Australian LMIs do have the ability to use buybacks as part of their capital management and a number of LMIs have buybacks currently in operation. Despite this many continue to trade at large discounts to NTA with the buybacks being ineffective in reducing the discount. Continued buyback of securities will also lead to reduction in fund size and is unlikely to be of any real benefit to LMIs that are already subscale.
With regards to managing premiums, we note that some LMIs, such as WAM, have actually used their premiums in the past to issue new securities above NTA and hence lift NTA per share.
With AGM season fast approaching for the vast majority of LIC’s 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 continue
to expect further consolidation in the sector and other forms of corporate action designed to address both the issue of scale and persistent discounts.
(20min delay)