Looking at the Australian Foundation Investment Co. Ltd (ASX: AFI) share price, and it's clear that December so far hasn't been too kind. Australian Foundation Investment Co (AFIC for short) shares are trading at $8.27 each at the time of writing today, up 0.61% so far. This is a company that started the month at $8.25 a share, meaning they have been flat since the start of the month until today.
So what has sparked AFIC's miserly returns over December thus far?
Well, it's worth pointing out that the S&P/ASX 200 Index (ASX: XJO) has actually turned its month around so far and is now well in the green for December, up 2.2% for the month to date. That certainly doesn't make AFIC look too good since this listed Investment Company (LIC) is often held up against the ASX 200 benchmark.
So let's check out AFIC's most recent fund update for some potential answers. So AFIC released its 'NTA & Top 25 Investments' update last Friday for the month of November. It reported that the LIC had $7.55 per share (before tax) in net tangible asset (NTA) backing as of 30 November, which was up slightly from the $7.51 NTA that the LIC had on 31 October.
That put's its 1-year return (including dividends and franking) at 20%, a significant beat from the S&P/ASX 200 Accumulation Index's 17% figure for the same period. But these figures also tell us an interesting story.
AFIC share price lags in December…
You may notice that AFIC's current share price is well above what the company tells us its shares are actually worth on an NTA backing. That means that AFIC shares are currently trading on a premium – just over 10% to be exact. This is not uncommon in the LIC space. There is nothing that dictates that a LIC has to trade at its true value. As such, the market often assigns a premium, or discount, to LICs.
This is arguably influenced (there's no way to actually tell) by a number of factors, including performance history, expectations, and how well the market views a particular fund manager.
Given AFIC's decades-long history as a respected steward of investors capital, and its recent ASX 200 outperformance, it's not too hard to conceive why investors might place AFIC shares at a premium to their actual worth.
But this also gives the AFIC share price something of a 'premium buffer'. Investors can bid the price down and still sell AFIC shares for more than they are actually worth on paper. This might explain the divergence of the ASX 200's December performance and that of the AFIC share price.
At the current AFIC share price, this ASX LIC has a market capitalisation of $10.13 billion, with a fully franked dividend yield of 2.90%.
