The demand for LICs (Listed Investment Companies) from SMSFs has lifted considerably in the last year.
The role of consistent fully franked dividends is thought to be the major factor in the growing popularity of LICs, although their relatively low cost as an investment vehicle is undoubtedly playing a part. These two benefits are driving increased investment in LICs from SMSFs.
LICs are ASX-listed companies that manage funds which invest in Australian or international shares or private equity, (sometimes) often with a single sector focus.
The closed end structure of LICs is a major attraction. Investors can buy or sell shares in the LIC itself rather than shares in its underlying fund. The LIC has a fixed pool of assets that only changes when it issues shares to raise capital or has dividend reinvestment or option plans.
Clime Capital Chairman, John Abernethy says the LIC structure is also a big advantage for the fund manager. You could also say that it offers a big advantage for the investor “LICs have permanent capital and therefore can invest against the market (e.g., buy in a falling market). Unit funds, on the other hand, are subject to inflows and outflows of capital, which affects their long-term returns. They tend to invest with the market unless they are managed on an absolute-return basis with an ability to hold cash.”
Abernethy says dividends and franking credits are easier to manage in a LIC compared with a unit trust. Clime Capital (ASX:CAM), for example, pays quarterly dividends and is sought after by SMSFs and investors who are drawing down their retirement savings and need reliable income.
CAM currently offers investors a gross dividend yield of 6.9% on its ordinary shares (YTD at 27.2.15) after taking franking credits into account. It currently trades at a 7.8% discount to its pre-tax NTA of $1.03 (as at 27.2.15) which means there is potential upside for new investors, when and if that gap closes. CAM has had an enviable performance record (over the last five years) since present management took over in early 2009, delivering 13.1% per annum in total shareholder returns to the 24th of March, 2015.
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