Summary: Consider whether the LICs in our model portfolio are trading at a premium or discount to the net tangible assets held. At the time of writing, BKI is trading at a premium, PIC, PAF and TOP are trading at discounts to NTA and TOP is trading at the same level as its NTA.
Key take out: When buying LICs, keep in mind that NTAs fluctuate, and know why you want to hold the LIC in the first place. I do not buy LICs to trade, but because of a belief that the fund manager has the ability to grow the portfolio.
Key beneficiaries: General investors. Category: Shares.
For those only just tuning in and for those who sat back, and decided to get comfortable with the thought of the LIC model portfolio, you probably have one thought: Ok, the names have done well in this market. But can I buy them now? Have I missed the boat?
Below is a table showing the discount/premium to NTA using the share price and last reported NTA at the time of writing. The oldest of the NTAs was as of November 30.
Magellan Flagship Fund Limited
PM Capital Asian Opportunities Fund Ltd
BKI Investment Co Ltd
Cadence Capital Limited
Thorney Opportunities Ltd
Perpetual Equity Investment Company Ltd
WAM Research Limited
As you can see, some are trading at a premium and some are at a discount. To the uninitiated, this means if you buy the LICs that are trading at a premium you are paying more that what the sum of the LICs' holdings are actually worth. If you pay less you can are getting a bargain. But once again, it’s not that black and white.
Historically the larger LICs have traded at a premium to NTA when the market has been at its most turbulent. For an example of this, look back at the likes of AFIC and Argo coming through the GFC. Before the GFC they traded at a discount, but once it hit they immediately traded at a premium. It’s like the security blanket premium.
At the time of writing BKI is trading at a premium of 3.8 per cent. In my view this is not material. But let’s take into consideration this holding is the most exposed to the fluctuations of the market and it certainly has fluctuated since the start of the month. You could argue the NTA is less than $1.58. If looking for a long term hold and you have cash burning a hole in your pocket, buying BKI when the market is sub 5000 would not be a bad move.
As for PIC, PAF and TOP, these are trading at discounts to NTA. TOP is trading right on its NTA. Paying NTA is paying a fair price. Yes, it is always nice to get a discount, but there is nothing wrong with paying fair value. PIC and PAF still represent good value at current levels. They are stock picking portfolios, not portfolios that invest in markets or time markets. This is important to keep in mind.
Regarding MFF, if you take into consideration the outstanding options, which are well and truly in the money and will be exercised in 2017, the LIC is at a slight premium. But I do not see this as material. Given the fluctuations we are experiencing, it is my belief the patient will be able to invest at fair value.
CDM is the only LIC in the model portfolio that I would call the premium material at the moment. But be patient and wait for it to pull back in the current environment. It is hard changing calls on LICs to “buys” or “holds”, because if the share price moves 5 per cent towards NTA then an investor with their eye on CDM should pick some up. This movement can take place in a matter of days at the moment. Keep your eye on the share price movement and know the underlying value.
WAX is also trading at a premium but people are paying up for three things: historical performance by the Wilson brand, a good flow of dividends and a hefty cash weighting. This cash weighting is not unusual for any Wilson Asset Management LIC but it certainly provides a secure feeling for investors in these turbulent times.
When looking at the portfolio and potentially replicating it, keep three points in mind. Know the NTA, know that the NTA fluctuates during the month and know why you are buying these LICs. I do not buy in to LICs to trade them. I buy them because I believe in the underlying manager and their ability to grow the portfolio.