Australian shares are the largest asset class for SMSFs, and offer Trustees the potential for capital growth and income from dividends. Investing in Australian shares can provide:
capital growth over the longer term when share prices rise
a reliable and stable income, and
franking credits which can enhance the income yield if the fund is eligible for a rebate of tax paid by the company.
Investing directly in shares (rather than via a professionally managed fund) appeals to many SMSF Trustees because it enables them to:
take full control over which companies are included in the fund’s portfolio, and
determine when certain stocks are bought and sold to meet the fund’s liquidity needs and manage tax liabilities.
International shares offer SMSFs the opportunity to diversify their portfolios and take advantage of undervalued or favourable conditions in other markets.
While international shares represent less than 1% of all SMSF assets, they offer a much larger and broader opportunity set than domestic shares. This is because the Australian market:
represents only 2% of world market capitalisation
is dominated by banks and mining companies, and
has few companies in industries such as Technology and Healthcare
Including global shares in your fund’s portfolio can also:
reduce the reliance on the fortunes of the Australian economy, and
increase diversification, as not all world share markets increase or decrease in value at the same time.
Cash, including term deposits, is a core requirement for cash flow management and plays an important role in overall SMSF investment strategies. As one of the most widely held asset classes, cash gives Trustees the ability to:
earn interest while maintaining easy access to funds for future investment opportunities
receive all cash inflows (e.g. contributions and earnings from the fund’s investments) and pay all outgoings (e.g. fund expenses and member benefits where a release condition has been met). This is often referred to as providing the ‘cash hub’, and
hold the cash component of the fund’s investment strategy.
SMSFs can borrow to invest by using what is known as a “limited recourse borrowing arrangement” (LRBA). To establish an LRBA, your SMSF will need to take out a loan with a lender and invest the borrowed money and some cash already in your fund in what’s called a “security trust”.
Investment lending enables you to amplify your investment power by giving you the opportunity to borrow against your assets to invest more and, hopefully, improve your portfolio performance.
We’ve created a product specifically to help SMSFs boost their investment power. NAB Super Lever offers SMSFs:
A broad range of listed securities and managed funds to borrow against
Start with a small initial investment
Personal service and online access
The ability to monitor your NAB Equity Lending facility through our online platform nabtrade
Fixed income can play an important role in a diversified and balanced portfolio, as well as providing you a stable income in retirement. nabtrade enables SMSF trustees to access a wide variety of fixed income products providing them:
Increased diversification and reduced portfolio risk
Capital preservation in times of economic downturn / leading up to retirement when certainty is important
Provide a consistent cash flow – important in retirement
Reduced asset risk to capital as a result of the company failing as the fixed income products have a higher position in the capital structure.
Companies may choose to raise capital through the issue of new shares or debt. To raise capital, companies can access a large pool of investors and obtain funding for activities including expansion of business operations, acquisitions or to improve balance sheet strength.
If a company is looking to raise equity capital they may consider an Initial Public Offering (IPO). An IPO is undertaken when a company raises capital prior to listing on the Australian Securities Exchange (ASX).
Another example of capital raisings are hybrid securities, which are a combination of debt and equity, typically issued by banks. To find out more about hybrid securities, watch our Hybrids 101 video.