As the SMSF rush slows down, Laura Millan asks whether individual funds will withstand harsher market conditions and reviews member direct investment options.
It is a known fact that self-managed super funds (SMSFs) outperformed funds regulated by the Australian Prudential Regulation Authority (APRA) during the toughest years following the global financial crisis. This - together with the absolute control over investments and the rise of the do it yourself (DIY) trend in all aspects of life - has boosted SMSF numbers and inflows over the last few years.
But for the first time, this year the number of new SMSF establishments has slowed down. They fell by 24% to 22,822 in the year to June 2015. This is the lowest annualised SMSF growth rate since the introduction of the Simpler Super Reforms in 2008.
The Vanguard and Investment Trends 2015 SMSF report attributed the slowdown to "fewer people leaving traditional superannuation funds as a result of perceived negative performance." According to the research, in the period from 2013 to 2015 an estimated 12,000 people noted 'Poor super fund performance' as the reason for establishing an SMSF, down from 28,000 in 2011-2012.
While the Australian Taxation Office (ATO) is yet to release performance numbers for the year to 30 June 2014, the latest official figures show APRA-regulated funds steadily outperforming SMSFs since 30 June 2013. During the year to 30 June 2013, individual funds returned 10.5%, compared to 13.7% returns achieved by APRA funds.
"SMSF trustees have a bearish outlook at the moment, not surprising given recent market valuations but this is having a distinct impact on the investment decisions trustees are making, and in turn their funds' asset allocation," Vanguard head of market strategy Robin Bowerman said when the report was released.
The SMSF Association's director of technical and professional standards, Graeme Colley, warns against focusing on short term market returns when talking about SMSFs: "You will never be able to beat the market consistently on a monthly basis," he says. "If you have an SMSF, you need to think about the long term. If markets do change substantially, then you might want to think about rebalancing your portfolio, but you should do it in a measured way."
Trustees are already aware that the latest white papers by the Treasury contemplate a worse outlook for the Australian economy and deteriorated terms of trade. Investors would do well to diversify by investing overseas or away from the traditional combination of cash, Australian equities and property. An awareness of how local and international events will affect the Australian dollar can also help investors get ready for tougher market conditions.
"Diversification inoculates a super fund against downside performance. People need to think seriously that the Australian market will not perform as well in a challenging economy. Although it is true that when markets go down, SMSFs don't fall as much, mainly because they have high levels of cash," Colley says.
He thinks that trustees set up SMSFs "for the flexibility and the control. Some trustees are not paying attention to performance; they just want to have control over their investments and to manage their exposure."
The advice factor
SMSF portfolios within the SMSF sector have long been a concern. The Vanguard - Investment Trends research shows that "poor market outlook drove more SMSFs to adopt defensive investment strategies when making asset allocation changes over the past year. SMSFs stockpiled excess cash in their portfolios."
Total cash allocation is estimated to have increased from $146 billion to $160 billion, with excess cash -funds that would have been invested but were not because of market uncertainty - growing from 30% to 35% within the total cash pool.
At the same time, allocations to listed and unlisted managed funds continued to increase from 15% to 18% of total assets in the year to April 2015. The research, based on a survey of almost 4,000 trustees and 501 advisers showed that the average number of shares held by an SMSF is 18, with more than 50% of these being financials or resources.
"The large portion of assets that SMSFs continue to hold in direct shares, and the increasing levels of excess cash, present a range of issues for SMSF portfolios. They may be building in more concentration risk at a time when trustees are increasingly concerned about financial markets," according to Bowerman.
Financial advice and education are both key to portfolio diversification. Verante Financial Planning director Liam Shorte says he started tweaking his clients' portfolios to increase diversification three years ago. "We felt that the Australian market was doing very well, but that SMSFs had lots of Australian exposure. So we made sure that they had more exposure to international shares, property and infrastructure," he explains.
Lately, the firm has been concerned with "people coming to us heavily invested in cash but willing to invest." Shorte explains that he has been cautious with these new clients. "This is not a time to be throwing large sums of money into the market. We have been working towards preserving their money, rather than anything else."
This has involved "a lot of education and a lot of handholding." For example, he recommended a client to allocate about half of their money into a one year term deposit. At the same time, he showed them what other exposures would have done to their portfolio over that same period of time.
When he recommends clients to get into new investments, he chooses active managers that manage multi-asset or tactical asset allocation strategies. "Also a fair amount of international shares, and even some Australian ones, but we are avoiding the ASX20 including the banks."
Thinking global, finally
Australian-based equities managers are sensing an increase in demand for global equities funds. While it is still not visible through SMSF asset allocation numbers, moves in the funds management sector prove that managers expect Australian investors to increase their global exposure.
Veteran global equities managers in Australia such as Platinum Asset Management and Magellan Asset Management are seeing strong inflows to their retail funds. But demand for global equities funds managed from Australia or taking Australian investors into account is only increasing.
Only in the last month, Lazard Asset Management has launched a global equities fund that invests in large listed companies. With half of the investment team based in Australia, the fund looks for companies that have low valuations, a stable history and strong earnings forecast.
Pengana Capital recently appointed three new members to its distribution team ahead of the launch of its Global Equities Market Neutral Fund, built in partnership with US quantitative manager PanAgora Asset Manager.
At the same time, Ironbark Asset Management partnered with London-based Waverton Investment Management to create the Ironbark Waverton Concentrated Global Equity Fund, a long-only equity strategy that invests in 25 to 40 companies globally.
Perpetual Investments is another manager growing its global equities expertise with the recent appointment of two analysts. While group executive Michael Gordon says the firm is not planning to launch any new global equities funds, he explains that "Australian investors are becoming more confident with the idea of investing in global share funds. The opportunity set is greater for local managers because we are able to do it successfully and being locally based means that we have an empathy with the client and we are able to stay in touch with them more easily."
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Read more about...
, Investment Trends
, Graeme Colley
, Liam Shorte
, Robin Bowerman
, Australian Prudential Regulation Authority
, Ironbark Asset Management
, Ironbark Waverton Concentrated Global Equity Fund
, Lazard Asset Management
, Waverton Investment Management
, Magellan Asset Management
, Michael Gordon
, PanAgora Asset Manager
, Pengana Capital
, Platinum Asset Management
, SMSF Association
, Verante Financial Planning