Wilson Asset Management chairman Geoff Wilson says there are several key things to watch with an investment in an LIC.
First, look at the company’s profit reserve to see if it has the capacity to continue paying dividends at current levels. This can provide peace of mind for those worried about the capacity to pay dividends several years into the future.
Second, Wilson says it makes sense to buy LICs at a discount to net tangible assets. This provides the opportunity to purchase a high-yielding asset for 70¢ or 80¢ in the dollar.
However, Wilson says if you buy an LIC at a discount you have to think about what the catalyst will be for closing that discount. LICs managed by Wilson that are trading at a premium to NTA have benefited from marketing spend of about $2 million a year and have tight share registers due to their 15- to 20-year histories.
For example, WAM Capital was trading at a premium of 25 per cent and WAM Research was trading at a premium of 33 per cent at December 31, according to data from the ASX.
Read more in the Australian Financial Review.