A Listed Investment Company (LIC) like Mirrabooka is often referred to as trading at either a ‘discount’ or a ‘premium’. In the current uncertain economic environment, many ASX-listed LICs are trading at discounts which is an opportune time to revisit what this means and how Mirrabooka is valued.
Understanding discounts and premiums to NTA
Trading at a discount or premium refers to an LIC’s share price compared to its Net Tangible Assets (NTA) per share. NTA is calculated by dividing the total portfolio value by the numbers of shares on issue. For example, if an LIC holds a portfolio worth $100 with 100 shares in circulation, the NTA per share is $1.
However, the NTA doesn’t always align with the market share price. If the share price surpasses the NTA per share (e.g. at $1.05 in the example), the stock is said to be trading at a premium. Conversely, if the share price lags behind the NTA per share (e.g. at $0.95 in the example) then the stock is considered to be trading at a discount.
Well-established funds with a good track record will often trade at a premium, while newer funds lacking an established performance history will tend to trade at a discount. However, this isn’t always constant and funds will trade at premiums and discounts at various times. For example, Mirrabooka traded at a discount through much of 2020 due to economic uncertainty of COVID, but traded at a substantial premium until January this year.
Share prices can be influenced by factors such as investor sentiment, market cycles, and the supply and demand for shares. History suggests that LICs like Mirrabook will typically return to trade at or around their NTA over the long term which is our preferred position as a long-term investor.
Factors beyond the share price
Regardless of whether an LIC is currently trading at a premium or discount, investors should weigh factors based on more than just the share price.
Key considerations for investors should include fund performance over time, cost, the consistency of dividends, and the fund’s size.
1. Investment performance and costs
Effective management and a solid track record are paramount when evaluating investments; this is a core part of how we analyse the companies we invest in, and we expect most investors are equally rigorous when evaluating an LIC. An LIC with a history of strong performance, combined with competitive fees, is an appealing investment. Such attributes typically align the share price with the NTA over the long term. Some investors may even be willing to pay a slight premium if managers consistently deliver outstanding performance relative to lower fees.
Stable, fully franked dividends are a focal point for many LIC investors, particularly those like SMSF investors who are seeking income-focused investment strategies. LICs that consistently deliver stable or growing fully franked dividends often trade at a premium, whereas those with variable or no dividends can experience greater fluctuations between share price and NTA, resulting in persistent discounts.
Mirrabooka, regardless of trading status, has a track record of providing attractive and stable income for investors over the long term. Established LICs like Mirrabooka typically have profit and franking credit reserves which they can draw upon in more difficult times. We have been able to draw on these reserves to maintain attractive dividends to our shareholders even when companies are delivering subdued dividends.
3. Size of the fund
Typically the size of an LIC correlates with the long-term position of its share price relative to NTA. Smaller LICs often trade at discounts for extended periods due to lower liquidity, a limited shareholder base, and reduced general investor awareness. With a shareholder base of more than 7,800, word of mouth plays a significant role in driving demand for Mirrabooka shares which means periods of share price discount to NTA tend to be brief.
4. Capital Gains Tax advantage
Tax considerations significantly impact investor returns. Mirrabooka’s buy-and-hold approach typically results in minimal capital gains tax, given the infrequent sale of positions. When capital gains do occur, we aim to pass on LIC credits generated by these gains as part of the dividend, offering shareholders potential tax deductions.
Our share price relative to NTA per share often mirrors market conditions, including income outlooks, interest rate levels, and investor sentiment toward risk. In the current climate marked by elevated interest rates, short-term focus on discounts and premiums may dominate market sentiment.
We believe the true value lies in considering factors contributing to the long-term performance of an LIC. While share price relative to NTA is a relevant consideration for timing purchases, it is only one facet of the equation.
However investors should be wary of buying shares in an LIC when they are trading at a large premium to NTA. At this point Mirrabooka is trading close to its NTA at the end of September 2023.