Listed investment companies (LIC) will look for a stronger 2011 as the share market recovers, dividend yields edge higher and regulatory changes help the sector.

Sixty-two LICs and trusts had a combined $19-billion market capitalisation in November 2010, the latest Australian Securities Exchange data on listed managed funds showed. The LIC sector grew 5.1 per cent over the year to November, yet is well below a peak of about $30 billion in 2006.

The average discount to net tangible assets (NTA) on a pre-tax basis oscillated between 13 per cent and 16 per cent for the LIC sector (on an unweighted basis for market capitalisation) in the first eight months of 2009. The discount narrowed to 9 per cent in September, 7 per cent in October and 11 per cent in November.

A sizeable discount between an LIC's shares and its NTA is a constant frustration for many such companies and their investors.

The closed-ended structure of LICs, which means their managers do not have to sell stock to raise cash for departing investors, is arguably a key advantage over funds with open-ended structures that may have to sell stock to meet investor redemptions.

Larger LICs are popular with self-managed super funds. Some small LICs trade at hefty, seemingly permanent discounts to their NTA, due to limited performance history, weak dividend records, share illiquidity or fee structures. An LIC with an 80-cent share price and $1 of NTA argues it is a bargain, but investors may not want to know.

Conversely, some LICs trade at a premium if investors are willing to pay more than the assets are worth because of the manager's record. The largest LIC, Australian Foundation Investment Company (capitalised at $5 billion), traded at a consistent premium to its NTA of about 4.7 per cent in 2010.

The second-largest LIC, Argo Investments, traded at a 6.1 per cent premium in November.

The greater focus of larger LICs on dividend-paying industrial stocks rather than small and mid-size resource companies may affect their relative performance if the resource rally continues.

The LIC sector was boosted last year by regulatory amendments that allowed companies to apply a solvency test in determining the amount of any dividends that can be paid to shareholders, rather than being required to pay a dividend out of profit. This gives LICs better ability to manage dividend payments - an uneven dividend record is one reason some LICs trade at a discount to NTA.

It is too early to say if the narrowing of the average discount to NTA in the LIC sector will continue in 2011. If it does, investors might find more opportunities in a sector that has been out of favour in recent years.