My SMSF – half-yearly check-up

What does this time of year mean for your SMSF?

It’s that time of the year when the media gives us New Year resolutions, predictions and share market tips. As a former daily newspaper journalist, I once merrily joined the game to fill those empty pages – unaware whether anyone was heeding the advice. Now, this season is simply a reminder to check my super fund’s investment strategy.

It’s usually only a check rather than a full-blooded review or renovation. The financial year-end is the more natural time for that, when accounts are finished, reports are completed and the annual figures provide the necessary measure of a year’s performance.

What checks have you done?

I’ve just completed my half-yearly check, beginning with the most important thing – my fund’s overall asset allocations. I regard this as the key to my investment strategy (and it also fulfils that pesky requirement on which the regulator insists).

What’s your asset allocation?

My fund has run on a rough split of 60% of assets in equities and 40% in cash and fixed interest for about five years. There’s no science in that ratio: it just seems to work for my needs. Over the past couple of years, it’s managed to balance a need for dividend income (when interest rates are low), against the need to hold a buffer of safe money to ensure pension distributions if tough times hit the stock market.

Over the past 12 months, the equities percentage has risen from 59% to 62%, largely because of a slight improvement in the stock market and slight cutback in the holding of bank hybrids. I’m not looking to move any more money into shares unless the climate changes and I think I’ve de-risked the share portfolio with some adjustments in 2014.

What investments do you like?

Some SMSFs like to pick stocks. I like to pick the best stocks – after assessing the big issues. My list of big issues includes: China and commodity prices; a softening local economy; interest rates and a weakening Australian dollar. That has led the fund to hold the lowest cost resource stocks (BHP fills that bill); higher yielding, defensive local stocks; short-term bank term deposits and to buy more US stocks.

What have you changed?

The major change has been an increase in the overseas share component from under 6% to more than 10%, by adding to the fund’s holding in the S&P 500 ETF (IVV) and maintaining another global equity ETF (the SPDR WXOZ).

The bank component (including hybrids) has declined from 31% to 25%, reflecting some hybrids maturing and sale of Bank of Queensland. Maybe the Murray Report might slow the banks’ growth but the market seems to be comfortable with the current valuations of the Big Four – and bank dividends produce about 27% of my fund’s total current projected income.

The wish for defensive stocks has seen an increase in the health and infrastructure sectors. A modest holding in Medibank Private and growth by CSL has seen the health sector increase to 8.6%, hopefully providing a defensive element. I take a similar view on infrastructure (11.6% of assets), adding to the existing Transurban holding (now the second biggest individual holding) and increasing the APA holding through its new issue. The fund also bought Sydney Airport in 2014.

In resources and energy (7.7%), the fund is a firm holder of Woodside (despite some market sceptics) and is sitting on its largest paper loss with BHP. So far, it has resisted the temptation to try and pick a turning point in resources prices or stocks. Any bargain hunting will probably reflect any revival in oil prices, with Oil Search the likely target.

Like many SMSFs, Telstra has been a mainstay for capital growth and income and it has been tempting to chase the stock as it rises. But it now comprises almost 10% of the portfolio, approaching my unofficial limit for an individual stock.

Stock selection is a compromise between seeking some potential growth stocks and the need to fund pensions, hopefully from current dividend income.

How is its performance?

Total income rose over 11% in 2012-13 and projected 2014-15 income (from our helpful stockbroker’s analysis) could rise another 12-13%. This has been achieved despite holding only about 4% in higher-yielding property trusts – Novion (the successful Chadstone centre) and an ETF which replicates the listed property sector.

What are other considerations?

The fund has stood aside from borrowing to invest in direct property. This is because of a general dislike of gearing; a suspicion that apartment (and other) property values could be affected by potential over-supply; the risk of higher interest rates; adequate exposure to property via the family home and a history of generally miserable net returns from rental properties.

The fund’s biggest punt is on the Wall Street market via ETFs. This is based on a view that the US economy and stock market are the most robust in the world and that, if the Australian dollar remains under downward pressure, this is the most straightforward way to profit on the exchange rate.

Thoughts on the year ahead?

So 2015 will probably see the portfolio stay on cruise control, absent any major incidents. As structured, the portfolio is set to provide modest income growth, with a conservative approach to capital preservation. There are possible worries with the economy (and perhaps the share market) though there’s probably more risk from legislative change in superannuation and tax (keep an eye on the debate on imputation).

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.