SMSFs expected to outperform: Research

SMSFs are expected to outperform in the current climate, due to higher than average exposures to cash and other low volatility assets, according to Rainmaker research.

Around a quarter of the SMSF sector is held in cash and about 45% is held in shares, compared to other super funds that hold 10% in cash and 60% in shares on average.

Rainmaker executive director of research Alex Dunnin said: "This heavy exposure to low risk assets like cash may prove to be fruitful in the current COVID-19 climate as they may be better protected than the average not-for-profit and retail fund."

"Some super funds' diversified default investment options have fallen 10-15% as a result of the current market conditions."

SMSFs reached a peak of 33% of all superannuation funds under management (FUM) in 2012, though this has since dropped to 26%, which is around $750 billion.

"A higher than average exposure to cash previously dampened the returns of the average SMSF when compared to a retail or not-for-profit fund, so perhaps it also damaged their appeal."

Interest in SMSFs has lowered, experiencing a 75% drop from their peak, the research showed.

A decade ago there were a net 40,000 SMSFs started each year, while only 12,000 were started in 2019.

Meanwhile annual superannuation contributions have fallen from $157 billion to $130 billion, and SMSFs made up 90% of the reductions.

This number is even more significant given that SMSFs only make up 9% of all superannuation members in Australia.

The research pointed to the introduction of the Transfer Balance Cap (TBC) in 2017 as a key cause for the reduction.

Following its introduction retirees with large balances, many of whom were likely members of small funds, appear to have responded by significantly reducing their contributions.

"The drop in contributions has been so extreme that SMSFs are only marginally ahead of the retail fund segment, which fell out of favour with Australians after the Global Financial Crisis," Dunnin said.

Other determining factors contributing to a decline in contributions are increased regulatory scrutiny, reductions in their taxation advantages and persistent attention on the segment's low benchmark investment returns.

Read our full COVID-19 news coverage and analysis here.

Read more: RainmakerAlex DunninGlobal Financial CrisisTransfer Balance Cap
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