Because it includes all costs and excludes complications - like capital raisings - designed to make performance reporting inconsistent and unfeasible to verify. I do include reinvestment of dividends. For actively trading LICs the NTA used is halfway between Pre-tax and Post-tax.
How do you gather the data on Starting Pre-tax NTA?
For IPOs: I use the NTA after offer costs which is often disclosed soon after listing in an ASX announcement titled something like "Updated Pro-Forma Statement of Financial Position." Where it is not disclosed I use 2.5% for the offer cost. It is often 3-4% for listings under $50 million.
For LMIs being tracked well after IPO I simply use the monthly NTA report closest to the relevant date (e.g. restructure, change of manager).
How do you gather the dividends and franking data?
I enter a 100 share Buy order for the LMI in Sharesight on the Start Date and then simply note the dividends and franking up to the end date. I use 100 shares as if you use less than 10 shares the franking credits would often be less than 1 cent and not be recorded in Sharesight.
Note: Sharesight reports this based on the Paid Date not Ex Div so you need to check some dividends to see whether the Ex Div date was prior to the End Date or not.
How do you calculate the End Pre-tax NTA?
In Excel End NTA = End Month NTA (e.g. Feb 2019) + Dividends + Distributed Franking Credits
What exactly is Pre-tax NTA? Does it always include tax on realised gains?
Pre-tax and Post-tax NTA applies to LICs. LITs don't pay taxes directly and these are paid by the investors.
The manager of WIC and OZG explains the LIC Pre-tax vs Post-tax situation as below:
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(1) NTA after tax: This is our net tangible assets per share on the nominated date after allowance for all fees and taxes. This includes an allowance for a tax liability on unrealised gains in the numbers above.
(2) NTA before tax on unrealised gains: This number adds back any tax provisions for unrealised gains on our portfolio holdings. Most LIC’s provide this higher number as part of the regular reporting process.
(3) NTA before tax: This number is before any allowance for unpaid tax, both on realised and unrealised gains/losses. In the situation where we have realised losses and hence a tax asset for future use, this removes a positive impact of recognising any deferred tax asset.
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Most LICs report (2) as Pre-tax and (1) as Post-tax.
Why not use Post-tax NTA?
For LICs that are buy and hold (e.g. AFI, ARG, MLT, etc) the gap can become very large, but often Pre-tax NTA is a closer measure than Post-tax as they don't ever crystallise the gains. However, the more different the portfolio is to a broad index, the more careful you need to be. MFF has a large gap but its concentrated portfolio is not close to any index and possibly could see crystallised gains at some stage.
And there are a few LICs which have had periods of major realised losses such that their Post-tax NTA is inflated substantially by a tax asset representing carried losses (e.g. CDM, LSF). This has value but not dollar-for-dollar with regular portfolio value.
Are undistributed franking credits included in NTA?
For Australian investors, franking credits distributed by LICs are very much part of the total return and investing considerations. I include them in my NTA CAGR calculations and they are included by default in Sharesight's TSR calculations.
However, conventional practice is not to include undistributed franking credit balances (held with the ATO) in monthly reported NTA. Instead they are noted in Annual Reports. After all, they are not a direct asset of the company and credits are only distributed for Australian investors under specific circumstances (generally sufficient dividends being paid in future, though capital return is sometimes also possible.)
Some LICs (PAF, PGF) started inconsistently (and I would argue incorrectly) reporting monthly NTA inclusive of undistributed franking credits. They don't even offer a separate NTA figure excluding them.
A big issue with large and growing undistributed franking credit balances is that they don't earn interest or compound. This can often be a big reason for LMI underperformance. E.g. See PAF.
When are taxes and fees taken out of NTA?
Ideally everything would accrue or be calculated monthly to align with monthly NTA reports.
Tax payable on realised positions should be accrued monthly and taken out on schedule (presumably quarterly). Where you notice unexpected jumps in tax effects you should investigate whether the cause is non-monthly accrual or something else. E.g. MVT is not just a fund manager of a portfolio it has other non-investment businesses, subsidiaries and ad hoc tax effects.
Management fees usually accrue monthly. Performance fees accrue on varying schedules depending on the agreement. This can be a major trap so requires close investigation.
I also suspect that where discretion is possible (e.g. invoice submission) as to when taxes and fees are taken out of NTA the fund manager may choose to do so in a month when returns are higher than normal such that the net effect is not so obvious.
Additional information on my NTA CAGR and TSR calculations
- For NTA calculations the inception NTA is often around 2.5% lower than the IPO price (e.g. $0.975 rather than $1). This was previously compensated by issuing options. More recently the managers have not issued options and instead initially absorbed offer costs though often this temporarily increases the LMI fees or costs as it is recovered. For my calculations, option value is included in NTA return (like a dividend) but not TSR.
- Dividends are not reinvested in these calculations but added to End Date NTA. Franking credits paid are included, undistributed franking is not included to ensure consistent comparisons but legitimately could be if assessing an individual LMI in detail. Option value is included using the expiry price but I note if the options traded much higher for a significant period.
Bell Potter summary of dividend and franking reserves
In its quarterly reports Bell Potter provides this guidance:
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Dividend Reserves & Franking Credit Balance
In comparison to a trust structure, Listed Investment Companies (LICs) have an advantage in being able retain earnings through periods to build up a dividend reserve. This assists LICs in maintaining a smooth and sustainable dividend over a long term that is often fully franked as opposed to trusts that are required to distribute all earnings to the underlying unit holders. Given they are a company structure, LICs are also required to pay company tax on corporate profits which adds an additional source of franking credits than can be passed onto shareholders in addition to receiving franked dividends from the underlying holdings. Therefore, when comparing dividend yields between LICs it can assist to look at the profit reserves and franking credit balances to analyze the future sustainability of the current dividend.
LICs generally source income from either dividend income from the underlying holdings or from capital appreciation and realisation of the holdings. Income that is heavy relied on from capital appreciation will tend to be more volatile and, as a result, having a stable level of profit reserves dedicated to the future distribution of dividends can assist LICs in maintaining a dividend through periods of poor market performance. The same methodology is applied with maintaining a franking credit balance.
Many LICs will differentiate their dividend reserves from their profit reserves which are likely to include unrealised gains and losses from investments which may not be actually realised at the current values. We have therefore chosen to report only the specified dividend reserve when provided to give a more accurate measure of the reverses being held for the future distribution of dividends.
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