SMSFs continue to invest in assets they understand

GUEST OBSERVER

SMSF trustees are still consistently investing in assets they understand and can trade easily.

Australian Taxation Office (ATO) figures show that although there might be a bias towards Australian investments, a lack of diversification across asset classes is typically not an issue.

When critics of SMSF trustees’ asset allocation point to a lack of diversification, they often highlight the absence or low allocation to assets such as international equities, forgetting SMSFs are still getting exposure to these assets via ETF’s, listed and unlisted trusts and managed funds.

The investment returns that SMSFs have consistently generated over the years speak volumes for the capacity of trustees to manage their investment portfolios.

Based on ATO statistics, for example, for the eight years from the 2007 financial year to the 2014 year, SMSF returns outperformed all other alternative superannuation arrangements for four of those years.

Although in recent times, the predominant asset allocation of SMSF trustees has not performed as well compared to alternative funds, it is still within reach. APRA statistics for the 2015 financial year, for example, show the return for SMSFs after expenses (excluding contributions) to be 5.7 percent. This compares with non-SMSF returns of 8.5% for the same period.

These returns do not support the suggestion that SMSF trustees are dangerously out of their depth or incompetent in investing their members’ superannuation balances. It also has to be noted that many SMSFs are in pension phase and therefore have more defensive investment portfolios to suit their needs.

The asset allocation of SMSFs has remained largely consistent over the years, rejecting the suggestions that they continue to load up on bank stocks or residential property.

As the two tables below show, residential property has only inched up half a percentage point in that five-year period (2011-16), while Australian equities have dropped one percentage point.

All the evidence suggests SMSF trustees are prudent, investing in asset classes where they have knowledge, or giving the responsibility to a manager where they lack expertise. It’s hardly surprising really – it is their money.

For the year to 30 June 2016, SMSF assets totalled $622 billion. The percentage break-up of the same asset classes were:

•   Australian listed shares – 30%

•   Australian residential property – 4%

•   Australian commercial property – 11%

•   Cash & term deposits – 26%

•   Overseas investments in total – 1%

•   Listed & unlisted trusts & other managed investments – 19%

•   Debts & loans – 2%

•   Other investments – 7%

  The year to 30 June 2011 told a similar story. Assets totalled $402 billion in the SMSF sector. The percentage break-up of the same asset classes were:

•   Australian listed shares – 31%

•   Australian residential property – 3.5%

•   Australian commercial property – 11.5%

•   Cash & term deposits – 28%

•   Overseas investments in total – 1%

•   Listed & unlisted trusts & other managed investments – 18%

•   Debts & loans – 1.5%

•   Other investments – 5.5%

Peter Hogan is head of technical at the SMSF Association and can be contacted here.