re: 6 dollars for first time in its life, page-12

re: 6 dollars for first time in its life "CK - if you have the patience! I hold ARG, DUI, AFI and ARG roughly equal amounts and total about 40% of SMSF. However, I worry about the circular holdings eg DUI hold AUI and other LICs, AUI hold DUI and other LICs, AFI holds other LICs, etc. Thinking this must dilute the return? When I tried to reduce exposure to DUI (grown to much because the rights issue) found it very difficult to dispose of because of such low volumes traded. Hence I also was thinnking the reduction in price to NTA is not something you can make up when it is time to seel, you still take a hit on the discounted NTA. Thanks"


I dont know much about AFI, but the 'circular' holdings in the 6 I do own are :

DUI : nil
AUI: own DUI
ARG: own DUI, AUI, MLT, CHO, BKI
MLT: CHO
BKI: MLT, CHO
CHO: MLT

In my valuation spreadsheet I actually account for the cross-holdings. I calculate a net-NTA which is based on each LIC's direct holdings plus the 'direct' holdings embedded within the LIC's they hold.

The result is this :

If *ALL* LIC's trade at discounts (the typical case), the cross-holdings work in *their* and *your* favour. This is because the 'parent LIC' has its NTA calculated by marking the 'child' NTA to market, but we know that this understates the true worth of the 'child' LIC.

Example from End-October-2006 :

AUI : Market price : $7.40
AUI : Announced NTA : $7.79
AUI : 'my net calculated NTA - due to DUI holding' : $7.91

Conversely, when LIC's trade at premiums to NTA the cross-holding work against you.

My other observation is that depsite all of the above, the effect of the cross-holdings on the large LIC's is minimal

For instance, from October 2006, despite the fact that CHO ended the month at a big premium to NTA (weird price $6.50 - NTA $5.80 - I remarked at the time here on HC that this was probably a order typing error by the last buyer that month) and MLT finished the month at $20.60 against an NTA of $20.24, the effect on ARG was :

ARG : Market price : $7.67
ARG : Announced NTA : $7.18
ARG : 'my net calculated NTA - due to LIC holdings' : $7.16

As for your other points, I must admit that it has never occured to me to sell LIC's.
I buy them -always at discounts- becuase of the opportunity to buy some of the best portfolios around at below market rates.
Under this scenario, as you well know, the attraction is in getting the full long-term economic benefit of say 1,000 NAB shares by paying 5-10% less than what it would have cost me to buy them on the market. In other words buy 5-10% more of the underlying shares per $1 invested.

When it comes to selling, you might have a problem.
ARG (and I would expect AFI to me the same) will not be a problem. Not only are they more liquid, but also from time to time trade at premiums, as illustrated by my example above.

But AUI, DUI would be a problem. I have bought DUI at 16% discount once, and I have seen the discount shrink to 3%.
But the discount does persist.
Its that kind of stock.
Melbourne establishment, buy-and-holders.
They buy for wealth preservation, have few reasons to sell.
Market depth typically comprises of buyers sitting on the bid (below NTA) and very few sellers (sometimes no sellers).
Most sales are on the bid.

Question. Why did you not sell your rights on-market as a way to reduce your exposure ?