Wilson says keep the faith in LICs and LITs

While some investors have been exiting Licensed Investment Companies (LICs) and reallocating their capital to other asset classes, Wilson Asset Management chair, Geoff Wilson is telling shareholders the tide will turn.

Wilson said that since he started working in markets in 1980, there had been many market cycles, including the widening and narrowing of share price discounts and premiums to net tangible assets (NTAs) within the LIC sector.

“The LIC sector in Australia is currently experiencing one of these cycles, with share price premiums to NTA moderating, and in many cases becoming discounts,” he said.

“A small number of investors that sought the attractive and regular yield offered by the LIC structure during a low-interest rate environment have now reallocated capital to other asset classes, like term deposits and fixed interest.”

“This is impacting supply across a majority of LICs and listed investment trusts (LITs) that have historically traded at share price premiums to NTA and are now trading at discounts. For example, large and established LICs such as Australian Foundation Investment Company (ASX: AFI) and Argo Investments (ASX: ARG),” Wilson said.

He noted that, as at 31 August, the Wilson Asset Management Strategic Investment portfolio had a 82.7% exposure to LICs and Listed Investment Trusts (LITs) trading at a discount to NTA, as well as select direct discount asset investments.

“Taking advantage of the current environment of discounted assets allows investors to achieve higher returns as discounts narrow to NTA parity, as well as providing downside protection, enhancing risk-adjusted returns,” Wilson said.

“The US Federal Reserve and other central banks have begun cutting interest rates, and we expect interest rates in Australia to be cut in the first half of 2025. Several major Australian lenders have already reduced term deposit rates.

“In a falling interest rate environment, we believe investor behaviour will again shift towards high yielding assets with stable and predictable income streams, like LICs and LITs. This shift in demand for high quality investments with a proven track record of delivering returns for investors will push share prices back towards parity to NTA, if not a premium.”