High share market volatility has crunched the listed investment company (LIC) market in the past 12 months and potentially created opportunity for contrarian investors.

The market capitalisation of all LICs slumped 19 per cent, from about $19 billion in January 2011 to $16 billion in January 2012, Australian Securities Exchange (ASX) data shows.

The 12-month average trade volume in LICs fell 46 per cent over that period.

The ASX LIC Composite Index, a measure of LIC performance, fell 18 per cent last year to 836 points. It peaked at 1340 points in October 2007 and slumped to 704 points at the bear-market low in March 2009. The index, now 884 points, is up 5 per cent this calendar year.

Of more concern is the one-year total shareholder return of some larger LICs. The $4.1-billion Australian Foundation Investment Company (AFIC) returned negative 14.6 per cent over one year to 31 December 2011, Morningstar data shows.

The $3.1-billion Argo Investments returned negative 16.24 per cent over that period. The third-largest LIC, Milton Corporation, lost 7.5 per cent. That compared to an 11.4 per cent fall in the All Ordinaries Accumulation Index.

The LIC sector's average discount (unweighted for market capitalisation) to pre-tax net tangible assets (NTA) was 9.35 per cent in December 2011, ASX data shows.

It hovered around 10 per cent for much of 2011 and frustrated investors and managers who believe their LIC's share price should trade in line with its NTA or at a premium. Some LICs trade at seemingly permanent discounts to their pre-tax NTA because of concerns about dividend and investment performance, management or other reasons.

True believers in LICs expected a stronger performance. Changes to the Corporations Act in June 2010 that allowed companies to pay dividends, as long as they are solvent, gave LICs greater flexibility with dividend payments - a big problem in the sector previously.

Financial planning reform around commission payments from 1 July 2012 is another boost. It could encourage advisers to pay more attention to products such as LICs and exchange-traded funds (ETF), which do not pay trailing commissions, and create more even competition with managed funds.

Huge growth in self-managed super funds and more interest in low-cost investment products were also expected to help LICs. In theory, long-term investors would use ETFs for low-cost index or passive exposure and large LICs for low-cost, moderate active exposure. But strong growth in ETFs, albeit off a low base, may be partly behind the lower interest in the LIC sector.

Critics of LICs might see the lacklustre collective performance in 2011 as further confirmation that the sector is best avoided. Value investors could see it differently.

Bell Potter statistical analysis suggests LICs have a tendency to revert to their mean discount or premium to their pre-tax NTA through the cycle. Simply put, rather than look at the current discount or premium in absolute terms, investors need to compare it to the LIC's average discount or premium over a longer period.

Of course, discounts and premiums to NTA are only one consideration in choosing an LIC. But having large, well-run LICs, such as AFIC and Argo, trading well below their historical averages (in terms of premiums or discounts to NTA) could be an opportunity worth further research.