Agree, expect index like performance from AFIC. It is at about a 7% discount to NTA so there is a case. They also tend to fall less in a market sell off - trade to a premium - not a rule just seems to what happens to AFI and ARG.

The other reason is the fully franked dividends only over a passive index that isn’t fully franked.

At the end of the day the differences in fee is about 0.08% or so currently so not that material.

AFIC is underweight resources like BHP generally so will out or underperform accordingly.

Good place to find the LIC discounts, historic premiums and discounts and past performance is at this link https://www.firstlinks.com.au/lic-reports and the bell potter one in particular https://www.firstlinks.com.au/uploads/2024/reports/BP_LIC_Weekly_Report_Indicative_NTA_3_Jun_2024.pdf as updated pretty regularly.

Thanks for those links @Mujo - and good points about the FF divs, and the relative drawdowns in market sell-offs, plus about the fees being only a tiny bit higher than ETFs. I hadn't checked that recently but AFIC's fees are indeed low for a LIC. I do note that despite AFIC being relatively underweight resources, BHP remains AFIC's second largest position (representing 8.6% of their FUM as at 31-May-2024) and RIO is at #10 for them, but FMG and S32 do not feature in their top 25. They also seem light on insurers (like QBE and Suncorp), although QBE has given us plenty of reasons to avoid them that have little to do with what sector they are in and way more to do with management behaviour - particularly in relation to past M&A.

AFIC are also light on Energy, other than their large Woodside position (#12) - no Santos and Origin in their top 25.

It's interesting that both WTC and REA are absent from their top 25, suggesting they are too old school - despite XRO and CAR being in their top 25. XRO has been coming good recently, but they did underperform there for a while, pushing out profitability under previous management while making some dodgy acquisitions - well not so much dodgy as overpriced - whereas WTC and REA are two of the best companies on the ASX - and AFIC have been at this game for a long time, so they had plenty of chances to pick both up at much lower prices and let compounding grow the positions.

I just don't rate them as good stock pickers - apart from ARB of course.

100% agree they need to be more nimble than they have been - but they are all about low turnover to avoid tax - which is their investment philosophy which i think has done them a disservice over the last decade. How you miss REA over that long a period is just crazy.

They have been roughly in line with the index overtime though on a pre-tax NTA basis.

@Mujo and @Bear77 Thank you both for your input and for the links you both provided. There's enough there to keep me occupied for some time.

Every now and then I ask myself is there an arbitrage play here somewhere with LIC’s? 

With AFI trading a the largest discount to NTA in over a decade, its got me pondering it again.

For AFI in particular: 

The chart in my original post, shows that it has not traded at this kind of discount to NTA in the last 10 years. So it seems like a rare occurrence. 

By way of example: 

AFI is currently trading at ~ -7.7% below NTA

The Bell Potter link from @Mujo has AFICs historical trading range between -7.5% (discount) to 19.6% (Premium).

Around 27 percentage point spread.

According to Bell Potter, over a three year period (I guess that's the last three years) AFI trades on average at a 5.2% premium to NTA.

So getting more conservative, -7.7% discount to 5.2% premium, the spread is now approx. 12 percentage points.

So buying at current levels, assuming the market holds up, history says that the market pays a premium to NTA more often than not. Ie: In this case there is a potential conservative 10-12% upside. 

You get the upside and the dividends/franking credits, all in a low risk play. Thats the idea.

There are other examples of this. BTI trades between -47% to 13.7%. Currently around -32%. I am not familiar with BTI so much. 

As @mujo says “They also tend to fall less in a market sell off - trade to a premium - not a rule just seems to what happens to AFI and ARG.”

On the flip side of the argument: 

Is it possible that a discount to NTA is investors saying “we think the shares held in the LIC are due to fall in price”? A lead indicator of market sentiment? If share prices fall, that is the other way to get price to NTA premium/discount back into “balance”.

Surely if this were an opportunity, there would be a computer somewhere making these trades. Maybe there is.

Ultimately, this trade only seems worthwhile if you think the shares in the LIC are headed up - obviously.

Perhaps the landscape has changed. EFT’s taking a bigger share of that market? And so this time is different?

Thanks for listening to my ramblings. If there is something I am missing, I’d love to hear about it.

These kind of trades aren’t going to shoot the lights out and are perhaps not worth to much thinking about.

Think it’s a logical trade if your benchmark is the ASX 200. Guess have to weigh up what is the catalyst for the rerate and expected time for it to happen. Also the trading range is a history not a rule and the advent of ETFs may have caused a systematic change.

I’d highlight it traded to a large premium a few years ago as was mentioned in the barefoot investor apparently and a lot of retail trader piled in not understanding.

Just highlighting the risks, but i think its a decent trade without much more downside - again if the ASX 200 is the benchmark.

I agree with that @Mujo - and you're asking the right questions @Arizona - I would only add that in terms of your comment/question: Is it possible that a discount to NTA is investors saying “we think the shares held in the LIC are due to fall in price”? A lead indicator of market sentiment? If share prices fall, that is the other way to get price to NTA premium/discount back into “balance”. That would make more sense if they were a thematic LIC such as a mining or small cap LIC, but they are almost an ASX50 ETF in terms of what they hold (almost, but not quite) so I doubt they are trading at a discount because people are bearish on the ASX50. AFIC (AFI) are trading at a discount because there is less demand for LICs these days and they don't offer too much that you can't get through an ETF. ETFs are a growing segment of the market and LICs are shrinking at this point, so ETFs are a more popular way to go.

ETFs trade at NTA (NAV) or very close to it because of market makers and because they just buy and sell their underlying shares on-market as demand for the ETF rises and falls, so they are what's called an open ended fund - their investable capital (or FUM) rises and falls depending on demand. LICs on the other hand are closed end funds, meaning that the pool of investable capital stays the same, other than CRs (DRPs, rights issues, SPPs, placements, etc) and M&A (acquiring other funds), so unlike an ETF the share price of LICs can move a fair way away from their underlying NTA purely because of demand. If they are popular less people want to sell and the prices are higher, and if they are less popular, people will be willing to sell out at lower prices - just basic supply and demand. You get the same supply and demand with ETFs but because they are open ended the unit prices don't move due to supply and demand with ETFs - the unit prices only move due to the underlying value of their holdings (NAV).

There are many factors that drive LIC discounts/premiums to NTA, but it all boils down to demand, so all of the factors that people talk about (reliable income, less of a share price fall in a market crash, fully franked dividends, active management that delivers value, etc.) directly impact demand - and it's that demand - or lack of demand - that ultimately drives the share price and creates the discounts and premiums.

AFI just don't have the same demand now that they did when they were trading at premiums.

@Mujo & @Bear77 Thanks for the conversation. I appreciate it.

Its great to get this stuff out of my head and have it kicked around by such thoughtful and knowledgeable parties.

Its incredibly valuable.

Thanks for taking the time