Have We Learnt Nothing From Investing In Closed End Funds / ASX LICs In The Last 30 Years?

1) IPO and early stage premium

Thankfully the listing costs are not as bad anymore as referred to in this old study. In fact, one good thing about LIC IPOs over the last year or two is that they have increasingly absorbed the listing costs, rather than the investor getting hit. For example, even in 2014 – 2016, we saw a heap of new LICs hit the market and quite often the investor would start with 97 cents worth of assets but had to pay $1 in the float. Much of the costs would be commissions.

I have been reading with interest Christopher Joye writing some articles in this area.

Usually we see the shares manage to hold their float price for a few months. Investors have gone to the effort of finding the application area details of the prospectus (I suspect the only part that many LIC investors read), so they will tend to hang on for a while.

That can often lead to holding a small premium to NTA for a little while. The promoters of the LIC have become skilful at instilling a bit of FOMO into the heads of investors also. Stockbrokers often were receiving a commission to place the LIC IPO with their clients. To help create demand they assist the fund manager in creating a good story to the media. Often a lot of hype is generated over their great long term (think 3 years or so in some cases!) performance records. Fees, MERs, IMAs are usually kept quiet on the other hand. The slick sales effort can often see the premium maintained for a while.

2) Discount to NTA soon appears after the shiny new car feel wears off

The old CEF study mentions a period of about four months in when already it is common to see a discount to NTA develop of circa 10%. From my observations in recent years on the ASX the discount widening probably sets in a bit later than that. I tend to liken it to how some people like to buy the brand new car out of the show room and it very quickly loses value after that.

Perhaps with LICs the discount can escalate when the brokers see another LIC IPO on the way. How about a trade idea they may say, sell Old LIC:ASX and buy new IPO ASX (where we get a commission)? There is no great need for the broker to say how great the fund manager is after their LIC hits the secondary market.

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