We're getting excited about LICs again

Every two or three years, an opportunity emerges in listed investment companies (LICs). The last great bargain hunt started in 2020 when the COVID recovery trade got underway. 

Right now, we're once again seeing a wide range of LICs at attractive prices. While we're not yet at levels as low as in 2020, we think more great buys will emerge over the next few months, and we're ready to go. Let's dive in and take a look at what's exciting us in the LIC universe, including a few of our favourites right now.

Affluence LIC fund portfolio – Discount to NTA history

Discounts are near historic highs

On 30 June 2023, the share prices of the LICs in our portfolio were at a 19.5% average discount to the value of their underlying assets (NTA). We’ve been running a dedicated LIC portfolio since 2016. The only time the discount has been higher was for a few months at the height of the COVID panic.

Debt LITs – getting paid to wait

Our favourite area over the past few months has been debt/fixed-income LITs. Many have been increasing income and distributions to investors, as underlying interest rates on their loan assets have increased. Most now have yields of 6-10%. 

The underlying portfolios have varying degrees of risk and geographic exposure. Investment strategies range from investment-grade Australian debt to high-yield global credit. Some, such as Metrics Master Income Trust (ASX: MXT) have exposure to private credit. This usually means the net asset value doesn't change unless an underlying loan is impaired. Others, like the KKR Credit Income Fund (ASX: KKC), hold publicly traded debt. For these LICs, the net asset value can fluctuate in line with changes in interest rates, economic conditions and investor sentiment.

In addition to the higher yields, a few of these debt LITs are trading at significant discounts to NTA. Our current portfolio favourites include Perpetual's Credit Income Trust (ASX: PCI), the NB Global Corporate Income Trust (ASX: NBI) and KKR's Credit Income Fund (KKC).

Global LICs look cheap - but be careful

Many of the globally focused LICs are trading at higher discounts than average. We currently have a reasonable weighting to global LICs. But while the discounts are attractive, in many cases the underlying investments the LIC owns are not that cheap in our view.

In contrast, one of our favourite global LICs right now is Platinum Capital (ASX: PMC). It's a combination of a higher-than-usual discount and an investment portfolio that screens well on valuation grounds. 

Another one that's interesting is VGI Partners Global Investments (ASX: VG1). VG1 has recently come into a Regal Funds Management stable, following a period of poor performance. Performance has started to turn around, net market exposure is only around 70% (which we've largely hedged), and a US activist investor recently joined the register.

The activists are here

There's been a lot of news lately about activist investors joining the registers of various LICs. In general, we view that as a positive sign. It shows there is value in the sector, and it increases the odds that various managers will be forced to deal with nagging discounts once and for all. 

However, in some cases, we're not sure the activists have chosen the right targets. In our opinion, the best outcomes are likely to come from LICs where the amount of funds involved is not that material to the manager. In such cases, the manager is more likely to be receptive to change, because the resulting loss of funds under management will be less material. 

They also tend to be more sensitive to the potential reputational damage that comes from having an LIC continually trading at a discount.

Partners Group Global Income Fund (ASX: PGG) is a good example where the manager has listened to shareholders and is doing something about it. In our view, several other debt LITs, including our three favourites named above are also a good chance of going down the same path. 

Magellan Global Fund (ASX: MGF) is another LIC that has been mentioned several times as a potential delisting candidate. There are now a lot of activists on the register, but in our view, it's going to take a while for this one to play out. In the meantime, there's a significant risk of a correction in US markets, meaning what could be gained from the discount closing, could also be lost from the NTA falling. Unless you have the ability to hedge out market risk, it may not be as attractive as people think at current valuations.

Invest with the activists

An option for investors who like the activism angle, but aren't sure which LICs will be impacted, is to invest with an activist and let them do all the hard work. Global Value Fund (ASX: GVF) has been a very good long-term performer with a focus on capturing discounts from listed and unlisted funds. They invest not only in Australia but also in the US and UK closed-ended funds, providing access to a wider opportunity set. In addition, the GVF team isn't afraid to push hard for change where it's warranted, and they have had some success in the past, including with several Australian LICs.

Another well-known activist LIC is WAM Strategic Value (ASX: WAR), which is part of the Wilson Asset Management stable. Many of their current holdings are activist shareholder targets. 

The Sandon Capital (ASX: SNC) team is well-known for not being afraid to pressure management where they believe change is necessary. With decent discounts and potentially attractive portfolios, both WAR and SNC are current holdings for us.

The area with the biggest potential

There are a range of mid to small LICs that invest in Australian small caps, resources and private equity. Many have our favourite combination of an attractive discount and an attractively priced portfolio. With the ASX Small Ordinaries Index still down 15-20% from the highs of 18 months ago, there's very good value in some of these portfolios. 

This provides an opportunity to profit in two ways. And since improving performance very often leads to a closing of the discount, we believe buying LICs with attractively priced investments is the easiest way to achieve above-average investment results over a three- to five-year period.

Many of the LICs in this group are under-researched, unloved, or both. As one example, we've recently been buying two smaller LICs at a price below the value of their cash, meaning we're effectively getting the investment portfolio for free. We continue to research this space heavily, with the expectation that further bargains will appear over the next 6-9 months, allowing us to put our remaining cash to work.

Some of our current favourites in this group include NGE Capital (ASX: NGE), both Thorney LICs (ASX: TOP and ASX: TEK) and Bailador Technology (ASX: BTI).

Want to know more?

We encourage you to do your research before investing in any LIC. If you would like to learn more, here are some of our recent wires on LICs:

• Building a diversified portfolio using LICs
• The key differences between LICs, unlisted managed funds and ETFs
• How to buy a LIC at the right price

Take care, and all the best with your investing.