The SMSFs versus the big guns

Print This Post A A A

As they review their very successful 2012-13 year investment performance, SMSF trustees might spend some time contemplating how they achieved their returns – and how they might repeat them in the current year. The reason: SMSFs still have what seems like an over-weight to cash and term deposits, which could become a handicap if short-term rates continue to sink.

A numbers game

Based on the last ATO numbers, SMSFs have 29.5% to 30.4% in cash, term deposits, debt securities and loans (the range represents the two numbers the ATO gives for funds in the accumulation and pension stages respectively). This contrasts with levels of cash and fixed interest of 20% or less held by industry and retail funds in their normal default fund.

In addition, the average SMSF appears to be heavily underweight overseas shares and substantially underweight in total share holdings, compared with the typical institutional competitor. The ATO figures give total share holdings of 30.8% for accumulation funds and 35.5% for pension funds with only 0.3% in overseas equities.

In contrast, the largest industry fund, AustralianSuper, has a total of 52% in shares  (including 23% overseas) in its default fund, while the CBA-owned Colonial First State fund is running at a total of about 67% (with just under 30% overseas) for those choosing a “growth” option.

When direct property holdings are included, AustralianSuper is running on about 64% total equity and CFS on an aggressive 80% in growth assets. By contrast, SMSFs are running just under 50% in total equities, including property holdings:  accumulation funds hold 18% and pension funds a lower 12.3%. (Unless recent spruiking has resulted in a spike in property investments, these levels do not appear abnormal.)

Consider all options

But, the total figures suggest SMSFs are under-weight equities at a time when opinion generally favours them over fixed interest markets that are now meeting head winds from rising longer-term rates. And in a scenario, for instance, where the $A stays weaker, share returns from overseas markets (especially the US) will be stronger, given institutional super funds leave more shares unhedged.

Of course, many SMSFs have deliberately kept a strong home bias in their share portfolios with an eye to perceived volatility in the currency and the long-term under-performance of overseas shares in local dollar terms. The big question is whether we now face a reversal of this accepted wisdom.

The other asset allocation question is whether the typical industry fund’s elevated holdings of “other assets” – notably infrastructure and private equity – will prove a useful defence against volatility, or whether the tactics of retail funds’ slightly higher property and fixed interest holdings will work.

SMSFs don’t have the direct investment option to invest in infrastructure (and now institutions like the Future Fund are buying up the limited listed alternatives like Australian Infrastructure Fund!). In addition, our infrastructure investments are now being scooped up by overseas funds, like the large Canadian pension funds. This situation is more than just an annoyance to some SMSF trustees; it represents a lack of long-term infrastructure investment policy by Australia.

Industry fund pioneer Garry Weaven last week suggested there were tens of billions of dollars in the super pool which could go into infrastructure – given the right conditions. With about a third of total super assets now in SMSFs, this de-institutionalising of the investment money cries out for an accessible investment vehicle.

An infrastructure bond offering secure, long-term returns which, conceivably, could have an element of inflation proofing should have wide appeal to many SMSF trustees.

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.

Also in the Switzer Super Report:

Also from this edition

View More Articles