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Given its sole business in investments, in assessing whether a listed investment company is a good buy, you should not only look at its portfolio composition, but also understand the valuation approach adopted by the firm.

How are the investment portfolios of investment companies valued?

Valuation of listed securities is usually made by reference to their closing price on the valuation day. However, as liquidity in listed securities varies, their closing prices do not necessarily represent their net realizable value, particularly when a sizeable position needs to be liquidated.

For unlisted investments, they are normally valued at the discretion of the management. In most circumstances, the original acquisition costs are used for valuation purpose.

Listed investment companies are required to publish their monthly net asset value (NAV) in newspapers and on the HKEx's website.

What are the common features of some currently listed investment companies?

Shares in most of the currently listed investment companies are not actively traded. Based on published annual reports, their portfolios of listed investments generally consist of inactive stocks.

Theoretically, one might expect the share price of a listed investment company to track its NAV. But this may not be the real situation. Figures show that, as of 30 September 2003, only 10 of the 26 listed investment companies tend to trade within 30% of their NAV. There is a high tendency for them to trade either substantially above or below their reported NAV(Note 1). Many of those companies which traded at a deep discount held a large proportion of cash, unlisted securities or listed securities of companies with smaller capitalisation in their investment portfolio.

What should investors be aware of?

Before investing in a listed investment company, you are advised to:

  • Read the relevant announcements carefully to learn more about the company's background.
  • Compare the NAV and share price. A large deviation between them, especially for a prolonged period, warrants particular attention.
  • Note the size of the company by making reference to its reported NAV. Economy of scale has an important impact on investment return on capital and ultimately return to shareholders. Relatively high and fixed operating expenses like salary, rents and management fees may substantially drag down investment return for a less well-capitalized investment company.
  • Check the proportion of listed securities, unlisted securities and other investments in the investment portfolio. This will usually provide a useful clue to explain the difference between the NAV and the market price.
  • Find out the valuation basis, in particular for its holdings in unlisted securities.

Note 1: As of 30 September 2003, shares of 7 investment companies traded at a premium to their NAV, while 5 of them traded at a premium of more than 30%. On the other hand, shares of 18 investment companies traded at a discount to their NAV, while 11 of them traded at a discount of more than 30%. There was only one company whose shares traded at par to its NAV.