A Listed Investment Company (LIC) traded on the ASX is a publicly listed company that invests in a portfolio of assets on behalf of shareholders, with its shares bought and sold on the exchange like any other listed stock, such as CBA and BHP. LICs are popular long-term investments because they are easy to buy and sell, can generate valuable franking credits, and operate with strong governance and transparency. Their closed-end structure allows managers to invest patiently without pressure from investor flows, while retained earnings let LICs smooth dividends and provide more reliable income over time.
While all LICs share the same basic structure, they generally fall into two types. Firstly, internally managed LICs employ their own investment teams, with costs included in a single expense ratio that typically falls as the fund grows. These are often older LICs, such as AFIC and Argo, and tend to follow long-term, low-turnover strategies. Secondly, externally managed LICs hire an outside fund manager and pay management fees based on assets, often with additional performance fees. These LICs are more common in recent decades and usually run more active or specialised investment strategies.
The interesting spice with LICs can occur when they trade at discounts or premiums to the value of their underlying holdings: A LIC’s share price can trade above or below the value of its underlying portfolio, known as its NTA. The share price reflects what investors are willing to pay, which doesn’t always match the portfolio’s value. When the share price is below NTA, the LIC is said to trade at a discount, and when it is above NTA, it trades at a premium. External factors, as well as risk appetite, can cause these premiums/discounts:
- Performance expectations: Strong past performance or confidence in the manager can push a LIC to a premium; weak results can lead to a discount.
- Dividend appeal: LICs with reliable, well-franked and growing dividends often trade at premiums, while uncertain income can weigh on prices.
- Interest rates matter. When rates rise, some investors move money into cash and term deposits, causing LIC discounts to widen. When rates fall, LIC dividends look more attractive, especially for established LICs with a long history of reliable, fully franked payouts.
- Market conditions: During volatile or risk-off periods, discounts often widen simply due to more sellers than buyers in the screen.
- Size and liquidity: Smaller or less liquid LICs are more prone to discounts.
- Capital management actions: Buybacks, dividend increases or wind-ups can narrow discounts.
The RBA is expected to hike interest rates twice through 2026, creating a perfect backdrop for some LICs to trade at discounts. However, as investors, there are 2 parts to this equation in our opinion: firstly, the LIC at a discount/premium, and secondly, where it trades historically, no difference to valuation screening we apply before buying/selling individual stocks. This morning, we have looked at the 2 largest LICs on the ASX from both sides of the managed fence.
