The combined market capitalisation of LICs rose from $15 billion to $17 billion in the year to September 2012, ASX data shows. An average 11 per cent discount to pre-tax net tangible assets (NTA) in June in the LIC sector had narrowed to less than 1 per cent by September. Persistently high discounts to NTA have frustrated LIC managers and investors for the past few years.
The largest LICs, such as Australian Foundation Investment Company (AFIC), Argo Investments and Milton Corporation traded at discounts ranging from 3.5 to 7 per cent in September.
AFIC traded at a 6.7 per cent discount to NTA at the end of April; Argo Investments traded at a 9.3 per cent discount and Milton Corporation at an 8.7 per cent discount. These LICs dominate the sector by market capitalisation, so any narrowing in their discount to NTA bodes well for the overall sector.
The sharemarket rally since May has clearly helped the LIC sector and more investors may have increased their exposure to Australian large-cap equities through the big LICs, which provide moderate active management at low cost.
Other investors may have perceived excessive value in the sector earlier this year, when the big LICs traded at historically large discounts to NTA. AFIC and Argo, for example, typically trade a slight premium to NTA over long periods.
But enthusiasm for a sustained LIC recovery should be tempered. The average monthly trade of LICs has fallen 45 per cent in the year to September 2012, and the average value of trades is down 23 per cent, ASX data shows.
There are nine fewer LICs than two years ago, and an ASX LIC Composite Index at 962 points is still way below a peak of 1340 points in October 2007. Some LICs have chosen to de-list because they could not narrow the large gap between their market price and NTA.
It was thought reforms to the financial planning industry would boost adviser demand for low-cost products, such as LICs, which did not pay trailing commissions to advisers and were at a competitive disadvantage to unit trusts.
Corporate reforms in June 2010 that allowed companies to pay dividends as long as they are solvent also boosted the LIC sector. Less dividend certainty in many LICs was a turn-off for income-seeking investors.
Those changes might finally be helping the LIC sector, which has had its share of detractors over the past few years. The sector traded at a whopping average 21 per cent discount to its NTA in February 2009 and there was a view that management and performance fees in several newer-style LICs were excessive.
Yet Australia has some excellent LICs, and some of the market’s best small-cap stock-pickers prefer the LIC structure over open-ended unit trusts, which can suffer from heavy fund redemptions that force managers to sell stock at the wrong time, and other tax complications. The biggest LICs, in particular, have good long-term records and much to offer small investors who seek reliable yield.
A few months of stronger LIC performance, off a low base, is hardly a trend. But after the collective disappointments of recent years, any gain will be welcomed by a sector that failed to deliver on its promise, even though the stars are slowly aligning for a more sustained recovery.
