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The benefits of LICs for SMSFs
The benefits of LICs for SMSFs

The benefits of LICs for SMSFs

Australia's self-managed superannuation funds (SMSFs) have traditionally relied heavily on income from key sectors across the Australian investment market, such as banks, telecommunications, retail and resources. However, with pressure on ongoing performance for many of these sectors and with global markets continuing to be turbulent, finding opportunities for yield and stable investment income may become more difficult for many retirees.

Fortunately, there are several benefits to listed investment companies (LICs) that can help achieve more certainty for Australia’s retirement nesteggs.

Hunting for income

For many retirees including those approaching retirement, finding additional income that suits their risk tolerance is essential. However, given the current investment landscape many may find the yield they are used to from fixed interest and term deposits is falling. As a result, we are seeing many investors looking to equity markets for income.

The risk tolerance for many SMSFs in Australia is understandably low. Therefore, increasing allocation to equities when searching for income can expose investors to additional risk which SMSFs will need to consider carefully. While diversification is a considered as a widely accepted way to reduce portfolio risk, it is also worthwhile considering how pooled investments are structured, including the benefits that different company and fund structures can offer.

The LIC structure

With income a key consideration for most SMSFs, a popular avenue to diversify share market risk and gain affordable access to equity yield is through LICs.

A LIC is a company listed on the ASX that has a fixed amount of capital on issue. It uses this capital to invest in a portfolio of securities which are actively managed. Shares in the LIC can then be traded on the ASX like any other listed share.

As a result of having a fixed level of capital, LICs often take a longer-term approach to investing as inflows and outflows of capital, which can often change quickly with market sentiment, do not impact its investment approach.

AFIC, like many LICs, is a closed-end fund and only issues new shares through dividend reinvestment plans or when good investment opportunities are believed to be available. The closed-end nature of such structures can help to reduce the impact of significant market events over structures such as ETFs. This may appeal to retirement funds and SMSFs with a lower risk tolerance.

It is important to note that, in a LIC, the dividend policy is set at the discretion of the company directors giving the LIC more power to control the distribution of dividends through market cycles, which can also benefit SMSFs looking for more consistent income.

LICs as a core component of SMSFs

A key objective for AFIC is to pay dividends which grow faster than the rate of inflation over time. We are also conscious that many of our SMSF investors are seeking consistency in income as they enter retirement. Having been investing for over 90 years, AFIC has reserves which may provide greater flexibility in supporting dividend flows to shareholders. AFIC’s cost is also very low at 0.13% (or 13 cents for every $100 invested).

When looking to invest across companies and industries with a history of consistent earnings, sound balance sheets, more consistent dividend payments and good management, it is worth speaking to your adviser about the benefits of LICs such as AFIC.

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