The S&P/ASX 200 Index (ASX: XJO) has dramatically recovered from its early losses this morning and has closed in the green, up 0.35% to 7,273 points. Despite this recovery, the Australian Foundation Investment Co Ltd (ASX: AFI) share price, or AFIC for short, remains in the red.
AFIC shares finished at $8.30 each, down 1.07% for the day.
This is rather strange since, as a Listed Investment Company (LIC), AFIC's portfolio is quite similar to the ASX 200's own holdings.
To illustrate, here are AFIC's top 10 ASX holdings, as of 31 August:
- Commonwealth Bank of Australia (ASX: CBA)
- CSL Limited (ASX: CSL)
- BHP Group Ltd (ASX: BHP)
- Wesfarmers Ltd (ASX: WES)
- Westpac Banking Corp (ASX: WBC)
- Macquarie Group Ltd (ASX: MQG)
- Transurban Group (ASX: TCL)
- National Australia Bank Ltd (ASX: NAB)
- Woolworths Group Ltd (ASX: WOW)
- James Hardie Industries plc (ASX: JHX)
That list almost exactly mirrors the ASX 200's current lineup. The only exceptions are Telstra Corporation Ltd (ASX: TLS) instead of James Hardie and Australia and New Zealand Banking Group Ltd (ASX: ANZ) in place of Transurban.
AFIC's August NTA reveals a share price premium
So let's check out what's going on here. We'll start with AFIC's Net Tangible Assets (NTA). Since LICs are what's known as a "closed-ended investment vehicle", their market valuation can stray from the value of their underlying share portfolio. In other words, an LIC's shares can either trade at a premium or at a discount to what they're worth on paper.
As of 31 August, AFIC tells us that its NTA per share stands at $7.71 before tax considerations and $6.36 per share after tax.
As you can gather from the current AFIC share price, this (before tax) NTA undershoots the current AFIC share price by around 8%. This means that AFIC shares are currently trading with an 8% premium to their underlying value.
This could explain today's share price fall in the face of the rising ASX 200. A big premium to an LIC's NTA could conceivably give nervous investors the chance to sell out of their holdings, even in the face of a rising market.
At the current AFIC share price, this LIC has a market capitalisation of $10.16 billion and a dividend yield of 2.89%, or 4.13% grossed-up with AFIC's full franking.
