LIC & LIT Why LICs over ETFs?

Further to WAM the following is the latest quarterly share price and NTA performance against the All Ords Accumulation Index. As @Snowball mentioned note the tailwind of discount to premium impact over the decade on the chart. However NTA performance is not really that spectacular vs the All Ords! Nothing like the performance garbage Wilson peddles in his media releases etc. Generally he publishes performance data before fees and expenses and uses other smoke and mirror tactics:



https://cuffelinks.com.au/wp-content/uploads/Bell-Potter-LIC-December-2018.pdf

 

Wow ok that’s interesting.

I guess the logic is they cough up the cash to cover the dilution and in turn they capture a good serving of fresh FUM which is locked in as a juicy revenue stream.

 

Yeah and in relation to the 4% payout where the hell is it coming from. Magellan are a value investor in a concentrated portfolio held longer term. It’s certainly not coming from the natural yield of the portfolio. Doesn’t take much thinking to work out where this 4% yield is likely to come from.

As for discounted this and that in a closed end LIT paid for by the Mgr the main beneficiary is the Mothership being the listed mgr.

The whole thing is a con in my view. If ever there was an asset class where passive investing shines then it’s in global equities. Hence I choose to ignore active global Mgrs such as Magellan. I love income but only when it’s real!

 

Great response @Nodrog

I have adhered to strategic allocation across super and personal names such that super has a bit more international and non-super has more ASX. This was to create a passive income stream for FIRE. If I need to sell down during FIRE I'll have to pay more CGT as well as receiving less income.

Your insights make me realise I should start to think more about my super structure strategy for the time I can get my dirty little hands on it. I'm putting in $25k a year but it sounds like there may be a point where I need to put in more than that to maximise the balance at 60.

I thought just maximise the size of the whole pile of money, but it sounds like I need it in the right super and non-super buckets AND it won't be simple to move from bucket to bucket.

Bulls Buckets - a new band taking the worst aspects of Rap, Hari Chrishna chanting and extreme metal to bring you an album that you and the family can listen to on the 1st of July.

 

Offbeat thought. Any chance at some stage of the SMSF actually buying the shares personally held? Super gets the shares, you get the money to pay some CGT - I think.

 

I assume you mean buying shares directly from the member as opposed to an in-specie concessional / non-concessional Contribution? Shares in personal names can be also used for these contributions rather than cash. A concessional contribution has the advantage of offsetting resultant CGT is own name.

From memory I think it’s ok? Done via an inspecie transfer to minimise brokerage. Related party rule doesn’t apply to public listed equities again from memory. Transfer of funds and good doco essential. To minimise CGT best done when the market tanks.

 

Yeah. Done both in the past. Seemed to pass muster or at least the ATO never queried it. Shouldn't say that because how far back can an audit go?

Slight addition. I've done the in specie. Wife did the buy thing once but so long ago the why is vague. Was likely done to use the concessional as much as far as possible.

 

I’ve done in-specie CCs and NCCs a number of times over the years to get personal shares into SMSF but never had the need for the SMSF to buy shares directly off us.

I think it was PT who during a phone conversation mentioned taking advantage of discounted Rights Issues / SPPs in personal names and SMSF then the SMSF buys the allocated shares in personal names as soon as issued. Of course from memory generally one is not supposed to subscribe to SPPs through different entities but many appear to ignore that. No CGT if purchase date same as allocation but shares end up in lower taxed Super environment.

Even if SMSFs are more impacted by potential franking credit refund changes there are a number of useful features not available to Industry / Retail Funds. Another example is that we used the bring forward of subsequent year’s CC to offset a lumpy CGT event. Double dipping they call it.

 

Apologies for the thread drift but @Nodrog and others, at what point did the SMSF become viable/worthwhile?

My wife and I are with FSS and our fees are around 0.5% and 0.1% and wondering if its worth while going down this path and if so at what point. Obviously legislative risk this year would be something to consider also.

Do you think the ability to invest directly in LIC's etc enhanced performance?

 

Like all things, it depends.

But as it’s getting harder and harder to accumulate large balances in Super to be cost effective, the headaches involved in running a SMSF, potential loss of franking credit refunds in SMSF but not most retail / industry funds and limited access to better unlisted property / infrastructure assets etc I’d think long and hard before taking the SMSF route.

You don’t need to sink everything into LICs / ETFs. I think better diversification and potentially performance is achieved (taking into account behavioural issues) by focusing on LIC’s / ETFs outside of Super then invest in a low cost Industry Fund letting them deal with all the Super complexity / asset management.

 

Thread drift.

I agree with the principle of "it depends." For sure an SMSF may have some advantages but no way should one go down that path for the sake of BBQ talk. It tends to irk me sometimes when I've encountered others who proudly declare they have established 'my' SMSF.

All well and good but I do wonder if one has been established to show they "have made it" in the eyes of others without appreciating the legal responsibilities of being a Trustee? Me being a bit cynical there.

I'd most likely wouldn't go for a SMSF now if I were starting over. Can be a right PITA.

Low cost fund, max out as far as possible the concessional (being aware that through salary sacrifice the employer could effectively reduce its obligations under the SG depending on the employment contract) and invest outside of super if personal funds allow.

 

The other issue too is that under the new rules if one of the two members dies and the remaining member has maxed out their limit then the deceased members benefit must be removed from the Super Fund.

A few issues.

With the total SMSF balanced dramatically reduced the remaining balance may no longer make it cost effective to run the SMSF given most fees are fixed in nature.

Secondly if the member who died was the one managing investments and taking an interest in the SMSF then the remaining member could be overwhelmed with the responsibility. So consider your partner who may have no interest in investing and dealing with the responsibility should you pre-decease him / her.

In our case under the generous old rules we were able to accumute a large enough asset base resulting in a very low fee. I also take an interest in investing and running the SMSF. But overtime with all the rule changes and wanting things simplier with age I’m now finding running a SMSF a PITA.

Should anything happen to me and my assets forcibly removed from the SMSF I’ve recommended my wife, who has no interest in such things, close the SMSF and roll over the assets to an Industry Super Fund.

Finally due to mandatory Super pension withdrawals the SMSF balance will decrease overtime potentially making it no longer cost effective. And as members advance in age they may find running the fund too stressful to loss mental capacity.

So as I said lots of issues to consider.

Similar to @SatayKing given the rules / limits for Super now and the PITA factor if starting over I’d go with a low fee Industry Super Fund Diversified Growth Option.

PS: Nothing like a good thread drift.

 

I agree with @SatayKing and @Nodrog that we would not go down the SMSF path again today. Back in the days when financial dinosaurs walked the earth and financial advice and advisors charged a percentage of fees under management SMSF was best for us. We were self employed so employer sponsored super was not an option. I can only echo the issues raised by @Nodrog now.

 

This is the active versus passive debate. I personally don't think you could expect to beat a low cost industry fund with a SMSF, and to do so would require a substantial super balance, much more time and carry a higher risk.

In super I hold no cash, just 50/50 VAS / VGS in Sunsuper with fees ~0,3% from memory.

I rationalise it as: "do I want to spend all that time and effort to learn everything about SMSF and investing only to get a comparable return by doing nothing?" And because I believe in passive there's no point setting up a SMSF just to buy index funds when it can be done cheaply elsewhere. Happy to hear a different viewpoint.

Time is your most valuable resource.

Not advice.

 

A conversation heard a while back:

"Hey Grog, I invest 30% of SMSF in Brontosaurus egg farm ETF, what you think? "

"I choose ethical Ice Age investments"

"That good choice Grog, but what about 16 bronze coin cap imposed by Labour party?"

 

Just bring the thread back on track a bit (although I'm tending the same way with super), how would the choice between LICs and ETFs change (if at all) if you were talking retirement phase?

Although still outside super.

 

I have SMSF with esuperfund with only two stocks like yourself (VAS + IVV). Fees are $899 per year. This is for all members inclusive. So if your combined super balance is atleast $300K the fees as a percentage of assets comes to 0.3%. Anything above $300K your fees as a percentage is < 0.3%.

In terms of time I would not spend more than 1-2 hrs per year. eSuperfund systems are very friendly and automates pretty much all bank transactions into the correct category. You just need to review at the end and hit submit.

Cheers,
Oracle.

 

Yep, esuper for me too.Cheap & easy as.

 

Apart from reducing the number of holdings personally and within the super fund, my approach hasn't changed a great deal.

Whether it's from personal investments or from super, money (dividends/distributions) is retirement funding as far as I am concerned. I don't think it matters one whit where it comes from.

As for LICs over ETFs it's whatever floats your boat. I hold both and so does the super fund - although that has now reverted entirely to accumulation for a number of reasons. Sure at one stage I was more heavily weighted towards LICs but that has shifted as I can see there are advantages in holding both. For me at least. I placed some brief comments in the LIC 2019 thread on my view.

It may depend on how complicated investors wish to make it. One or two annual distribution statements each year for a couple of ETFs or maybe 12 dividends statements each year from LIC's - except for this year with the additional one from MLT following the special dividend because they've got their knickers in a knot.