The four factors leading to LICs trading at a discount

5 July 2021
| By Laura Dew |
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Poor performance is not the only factor contributing to a listed investment company (LIC) moving to a discount, says Wilson Asset Management, as it seeks out opportunities in the space.

The firm listed its WAM Strategic Value (WAR) fund on the Australian Securities Exchange last week and it was seeking to take advantage of market mispricing opportunities including securities trading at discounts to asset or net tangible assets with the main focus being on LICs.

However, this did not necessarily mean the LICs chosen were underperforming as this was only one of four possible factors that could see an LIC move to a discount.

LICs in the fund included Templeton Global Growth, Magellan High Conviction Trust, Pengana International Equities and Naos Small Cap Opportunities.

According to FE Analytics, all four of these had seen positive returns over one year to 30 April, 2021, with the Naos fund, in particular, having returned 130%.

Performance of four LICs over one year to 1 July 2021

Jesse Hamilton, chief financial officer at Wilson, said the four factors were performance, dividends, fairness and shareholder engagement.

“It is a combination, there are some LICs that have good performance and some that have underperformed but where we think there will be a turnaround,” Hamilton said.

“Performance is the number one reason but also dividends as LICs are highly attractive for people seeking fully-franked dividends. Third is fairness and making sure the LIC treats shareholders fairly.

“The last factor is engagement, there are some LICs that have good performance but don’t communicate with their shareholders, these people are trusting you with their retirement assets so you have to treat them with respect and we have found better communication does stop people from selling.”

He said some discounts would close naturally but, in other cases, Wilson would proactively work with the LICs to improve their share price and to help them communicate effectively with shareholders. 

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