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

3) Volatile movements in the discount / premium to NTA, largely sentiment driven

If you think the LIC market has become more efficient over a long time then consider some of the premiums to NTA that have occurred on occasions.

I am talking about paying a premium of 30%, or even 40% in some cases. I am not talking about some strange inefficiency decades ago. Such large premiums have been seen in recent years.

Some staggering examples that spring to mind quickly for me are Wilson Funds, e.g. WAM, WAX, WAA. Quite a few other examples of massive premiums at times. You could take a look back at the likes of ALF, PMC, MIR, DJW, FOR.

Of course its not all bad, some staggering discounts have been seen also. I mentioned above WAX, from memory it was formerly managed by Wilson with a different strategy under the ticker WIL. I think it spent plenty of time at a discount in the 25-30% range. The now highly regarded Magellan LIC in MFF traded with a discount to NTA of circa 25% for quite some time after the GFC ended.

Surely some of the extremes like this is a bit of mean reversion going on? As the old CEF study suggests it is probably better to have a bias to assume long positions at very large discounts to NTA.

4) Activism and winding up LICs

A big part of the opportunity with LICs is when we can not only buy a good fund manager at a large discount, but also when a wind up is possible. Ideally you would want the scenario that happened with MFF. That is, you can buy them at a 25% discount to NTA around 2009/10 and live happily ever after as they invest your money well.

The odds can even be more stacked in your favour if you still win from another scenario. Perhaps in the next couple of years the fund manager continues to struggle a little. If the IMA structure / other shareholder ownership potentially lean towards a liquidation event, you can have a large buffer to cushion any downside (e.g. Discount contraction of 25% over a couple of years).

Unfortunately on the ASX now we still have many newer LICs that began in the last few years. This means they are often less than half way through a 10 year IMA term.

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