LIC discount effect softens long term

The level of discount or premium at which an investor purchases a listed investment company (LIC) may have a significant impact in the first year of investing, but this impact decreases in the long term, according to a new report.

Zenith’s latest research report into the LIC sector revealed beyond two years, whether an investor purchased the LIC at a discount or premium has less influence on total returns and long-term performance.

“While movements in share price relative to fair value may throw up advantageous opportunities to enter or exit positions in LICs, other drivers influence longer-term outcomes,” Zenith head of listed strategies Dugald Higgins said.

“This is important as it addresses a widespread view held by the market that LICs are unattractive versus managed funds because of their ability to trade away from fair value.”

Elsewhere, the report showed the rise in externally managed LICs has led to a wider diversity of asset classes and strategies, including small companies, micro-caps, long/short, Asian equities, fixed income and alternatives.

Higgins said 92 per cent of capital raised in 2017 could be attributed to externally managed LICs.

“While we view the increased diversity positively, advisers should be aware that the performance of some types of strategies may be influenced by listed market movements in the short term,” he said.

For instance, low-beta LICs, such as market-neutral strategies that aim to deliver returns with a lower correlation to markets, may have their short-term returns to investors increase or decrease depending on LIC share price movements. This shows as a discount or premium to a LIC’s fair value, which can constantly change.

But according to Zenith, LIC investors with a long-term investment horizon should not be discouraged by trends in the secondary market where discounts and premiums play out.

The report showed a steep decrease in the market capitalisation of LICs with an in-house investment team, down from 80 per cent to 49 per cent in the eight years to April 2018.

The LIC market has grown 16 per cent a year over the past six years to reach $39.4 billion as at April 2018.

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