I think that it could be a really good time to invest in listed investment companies (LICs) at the moment.
The job of a LIC is to invest in other shares and make a profit for shareholders. The LIC setup is a good structure to turn the investment gains and income received into a steadily growing dividend for shareholder, whereas an ETF and trust structure has to pay out the profit it makes each year, so dividend payments can be lumpy.
Depending on your view, the ability for a LIC to trade at a premium or discount to its net tangible assets (NTA) can be a blessing or a curse.
But, it does mean that we can purchase LICs at a useful discount when a discount arises.
Not only have share markets become more volatile over the last six to nine months, but they are also being affected by a few other factors.
Small-to-medium shares have suffered more than large caps, which is where a lot of growth-orientated LICs focus. The Labor policy of removing franking credit refunds for a lot of people also makes LICs seem less attractive if it’s implemented, though polls show Labor may not achieve enough seats in the Senate to change the franking credit laws. The trade war between China and the US isn’t helping share valuations either.
This has seen the NTA premiums of LICs like WAM Capital Limited (ASX: WAM) and WAM Research Limited (ASX: WAX) significantly reduce and discounts have opened up with other LICs like Australian Foundation Investment Co.Ltd. (ASX: AFI).
I am particularly attracted to the idea of buying things at a big discount to the NTA. The NTA has likely moved down slightly since the end of March 2019, but it’s likely that LICs like WAM Global Limited (ASX: WGB) and NAOS Small Cap Opportunities Company Ltd (ASX: NSC) are trading at discounts in the high teens to their NTAs.
I would really like to invest in WAM Global or NAOS Small Cap Opportunities shares with how nicely discounted they are before the election, it’s not often that LICs will trade at such a large discount.
Where to invest $1,000 right now
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Motley Fool contributor Tristan Harrison owns shares of NAO SMLCAP FPO and WAMGLOBAL FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.