Two prominent listed investment companies (LICs) are seeking to merge, creating a combined entity overseeing a portfolio exceeding $3 billion. The primary goal is to mitigate the persistent discount at which their shares have been trading. Under the proposal, Diversified United Investment would integrate with Australian United Investment Company, an organisation established in 1953 by stockbroker Ian Potter, now managing approximately $1.7 billion in assets.
Australian United Investment Company, like many LICs, has experienced a substantial discount, reflected in its market capitalisation of $1.4 billion. The company believes that the increased scale resulting from the merger “may lead to a reduction in the trading discount to the underlying investment portfolio.” They also anticipate reductions in operational costs, such as rent and directors’ fees. Australian United Investment Company is a listed investment company that invests in a portfolio of Australian equities. Diversified United Investment manages a $1.4 billion portfolio established by The Ian Potter Foundation and the Myer family in 1991.
LICs are losing favour to exchange-traded funds (ETFs) in the Australian sharemarket. Unlike ETFs, LIC investors can only enter or exit when another party is available to trade with them. This introduces a layer of complexity that sits beyond the performance of the company’s assets. When demand is weak, the opposite occurs, leading to a discount. This can frustrate investors forced to sell at prices below the investments’ actual value.
Currently, Australian United shares are trading at a 15.8 per cent discount to their asset value, significantly higher than the average 9.1 per cent over recent years. Diversified United has seen a similar widening of its discount, from 9.9 per cent over the past five years to around 17.8 per cent this month. As the number of LICs has decreased, the number of ETFs has jumped significantly.
