LIC stands for Listed Investment Company.
An LIC is a listed investment vehicle that offers investors access to a portfolio of shares in other companies also listed on the stock market. LICs are listed on the ASX and are bought and sold on the market just like BHP or CBA shares. Investors can decide whether the investment style and underlying investment portfolio of a particular LIC suits their own investment objectives and timeframe.
NTA stands for Net Tangible Assets and it is the value of the LIC’s total assets less the value of its intangible assets and the value of its liabilities.
NTA = Total Assets – Intangible Assets – Liabilities
The NTA price is the actual value of the portfolio the LIC manages.
The market share price is what the LIC trades at (the price you can buy and sell shares) on the ASX.
Each MEC Option held (stock code: MECO) gives holders the right (but not the obligation) to buy another share in the LIC at $1.10 up to the end of November 2018, free of brokerage or any other cost.
Issuing options for an LIC offers a few benefits for investors:
LIC Investment Performance is often disclosed on an NTA basis, not on an actual share price basis.
If the LIC’s NTA is greater than its share price, the LIC is said to be trading at a discount to NTA. For example, a portfolio of stocks with an underlying market value of $100 is available to you in an LIC to buy for a 10% discount – you pay $90 for $100 worth of stocks.
If the LIC’s share price is greater than its NTA, the LIC is said to be trading at a premium to NTA. For example, a portfolio of stocks with an underlying market value of $100 is available to you in an LIC to buy for a 10% premium – you pay $110 for $100 worth of stocks.
For several reasons (explained below) with both scenarios being an opportunity under different circumstances (also explained below).
An LIC trading at a discount exhibiting many positive attributes mentioned above could present an opportunity for shareholders who could benefit from unlocking value via the narrowing of the discount over time. Like any other investment, shareholders invest for the future and future growth.
This is not a YES/NO question. It really depends on your investment needs and the expectations of returns it will generate over the coming years, being mindful of the composition of those returns.
Let’s look at the hypothetical example of two LICs called ABC and XYZ.
It is clear that LIC ABC is a better performing company, but if you look at the discount/premium to NTA, LIC XYZ seems more successful. Although past performance is no guarantee of future performance, over a long enough period of time, it does provide an indication of a manager’s ability to generate returns (capital appreciation), which is an important consideration. On the other hand, other investors may not value the company the same way and the discount may even grow further.
Both structures have pros and cons. When choosing, consider the quality of the manager and investment team, the time frame of the investment, the tax implications, the asset class and the need for liquidity.
Also note that managed funds cannot choose when to pay distributions, as opposed to LICs’ dividends. Distributions may be higher for managed funds but they are also more unpredictable.
The information in this FAQ is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security by Morphic Asset Management Pty Ltd (“Morphic”) (ACN 155 937 901) (AFSL 419916). It does not take into account the investment objectives, financial situation or particular needs of any particular person. Any person considering investment in shares or option in the Morphic Ethical Equities Fund Ltd (“MEC” and “MECO”) should obtain individual financial advice based on their own particular circumstances before making an investment decision. Morphic does not guarantee repayment of capital or any particular rate of return from the MEC. Past performance is no guarantee of future performance. Statements of fact in this FAQ have been obtained from and are based upon sources that Morphic believes to be reliable, but Morphic does not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions and estimates herein constitute Morphic’s judgment as of the date of this communication and are subject to change without notice.