It once meant someone was slightly drunk. Now, the kids tell me, “lit” means something is excellent. That’s not what they are saying about LITs (Listed Investment Trusts) this year. Or LICs (Listed Investment Companies), for that matter.
These investment vehicles are listed on the stock exchange. Rather than the fund manager issuing or redeeming units to meet investor demand, investors buy and sell their units (or shares) to other investors on the stock exchange.
After a frenzy of capital raisings in 2016 and 2017, most of them now trade at a significant discount to their underlying net asset value (NAV), including our own Forager Australian Shares Fund (ASX:FOR).
The reasons include poor performance, high expenses (particularly in smaller vehicles) and a lack of liquidity. But the discounts also tend to be largest when the wider market is most pessimistic, and at their narrowest when enthusiasm abounds. For investors looking to capitalise on pessimism, there are few simpler, more profitable places to look when markets are in turmoil. A LIC’s underlying portfolio will often be trading at attractive prices, and you get to invest at a further substantial discount to that.
The confidence discount
Our own Forager Australian Shares Fund (ASX: FOR) traded as low as 55 cents on the 23rd of March. The heavily beaten up NAV that day was 65 cents. Unlike many other vehicles, the manager of this fund absorbs listing fees and administration costs, so the maximum base fee of 1.1% represents the total running costs for an investor. There is no long-term management agreement. And the performance fee benchmark compounds at 8% per annum, so that person who bought at 55 cents won’t be paying performance fees unless they have made a lot of money (the NAV would currently need to get back to $2.04 before performance fees apply).
The NAV was down by more than half and confidence in Forager was at a low ebb. But the principle applies across the sector. It’s common for the discounts to be widest when the underlying portfolios are most attractive.
Even today, you can still buy FOR at a 10-15% discount. We have hopefully restored some confidence. Returns average almost 10% per annum since inception 11 years ago and, as those profits are realised, investors are paid distributions. Today’s buyer gets a free 10-15% boost to whatever those distributions are in future.
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