How does the AFIC (ASX:AFI) share price compare to its net tangible assets?

How is AFIC's ASX share portfolio stacking up right now?

Sebastian Bowen

Author Bio Sebastian Bowen has been a Motley Fool contributor since late 2018. Sebastian found his passion for writing and educating others about shares and all things finance after completing his studies in political, economic and social science and enjoys bringing this passion to life at the Fool. His investment philosophy is a simple one – buying high-quality companies at prices that make sense. When he’s not researching his next investment at all hours of the morning, Sebastian enjoys classic movies and likes to unwind with a good book, newspaper or record. Areas of Expertise Dividend investing ETFs Education Bachelor of Political, Economic, and Social Sciences (Government and International Relations), University of Sydney Social Media X/Twitter Favorite Investment Quote "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." – Benjamin Graham

Published September 21, 2021 4:19 pm AEST

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.

A small child holds his chin with his head on the side in a serious thinking pose against a background of graphic question marks and a yellow lightbulb. — Image source: Getty Images

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.

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