(03) 9020 2905PORTFOLIO POINT: Exclusive: DIY fund trustees …
Memo to Australia’s politicians: The proof is out. Self-managed super fund trustees are no bunch of uneducated or lazy cash hoarders. They know what they’re doing. They’re active in their investment choices. And they certainly don’t need regulatory nannying.
A pilot survey, exclusively released to Eureka Report, shows the asset makeup of DIY funds is considerably different to the standard industry fund. SMSF trustees deliberately choose to hold more Australian shares, at the deliberate expense of international shares and, contrary to popular opinion, cash.
There should be no surprise there. One of the main reasons people start SMSFs is because they are unsatisfied with managed fund super and they want to exert more control over the assets their super owns.
They survey, compiled by the University of Adelaide for the Self Managed Super Funds Professionals Association of Australia (SPAA), showed SMSFs outperformed the Australian stock market in the 2008 financial year (although they underperformed a typical balanced fund) and paid far less than managed super alternatives in the way of fees to do so.
The results are the first to be aired from a broader project to map the makeup of Australia’s SMSF industry. And the early results will go some way to debunking a few theories about the predilections of SMSF trustees and their investing behaviour.
To start, the common wisdom has been that SMSFs have a far larger cash holding than the average managed fund super manager, either because they are lazy, slow to invest, or risk averse.
But the UoA/SPAA study of SMSFs showed the combined average holding of cash and fixed interest by super funds for the 2008 financial year was just 20.38%. This compared to 26% for the average default strategy in a managed super fund.
PLACE GRAPHS HERE
And SMSFs have a definite bias to holding what they know and understand. Just more than half (50.89%) of all holdings are directly held Australian shares, significantly higher than the 29% holding of a typical default fund.
They hold just 2% in “other or alternative investments” versus 13% in default funds and marginally less (8.9% versus 10%) in property.
What’s left? International shares. It’s clear that SMSFs hold far less of them as an asset class. It’s probably because it is difficult to get low-entry-cost access to direct international shares and they don’t like the loss of control or costs in managed funds. However, SPAA says further research needs to be undertaken to determine exactly how much less and why.
The average default managed fund strategy holds 23% of funds in international shares. The pilot study showed that an average of 17.9% of SMSF assets was held in “unlisted trusts”. Unlisted trusts will include international managed funds, further Australian managed funds and unlisted property trusts. This is another area where further research will fill out the how and why, SPAA says.
The anti-international shares bias is one that I’ve regularly noted in Eureka Report, as is the overall bias towards “cash and Australian shares” at the expense of international shares. The combined total is at least 71% (because we don’t know how much of the “unlisted trusts” is also in Australian shares) when you combine the two. Realistically, it’s probably around 74-75%. The comparative for default funds is 55%.
The fact that Australian shares are so strongly held will be no shock to Eureka Report readers. It’s your interest in this area, and the team’s expertise in it, that is one of the reasons you subscribe. At 50.89%, the holding is more than 75% higher than the 29% held by the average default fund.
From a performance perspective, the survey shows that in the year to June 30, 2008, the average SMSF in the survey produced a return of -11.64%. This compares with a return of -12.12% for the All Ordinaries, -13.4% for the ASX200 and -36.07% for Australian real estate investment trusts (A-REITs).
However, the 2008 financial year return of the average balanced super funds, as measured by SuperRatings, was -6.4%. That worse return for SMSFs reflects the heavier weighting to Australian shares, which were a poor performer for the financial year in question.
When it comes to fees, the survey found that an average of just 0.5532% was charged against the SMSFs in the survey, with total fees of $8684 being charged against the average fund in the 2008 year. Of that, nearly 21% went to financial advice services, 37.7% went on accounting and audit fees, 15.2% went on administration and 14% went on property expenses. The remainder was made up of insurance, government fees and other expenses.
There are a few notes to be made about from the UoA/SPAA survey. SPAA chief executive Andrea Slattery said that the 4500 super funds used in the pilot study were provided by SPAA’s 1700 members – largely accounting and financial planning professionals.
As a result, the study has an inbuilt bias or two. Firstly, the super funds themselves are considerably larger than the average SMSF (as measured by the Australian Tax Office). The average fund in the survey was valued at $1,569,756 at June 30, 2008. The ATO says the average across the then nearly 388,000 funds was $923,605. So the survey’s average is nearly 70% larger.
Slattery stresses the results must be taken in light of the fact that they are a pilot study for a more extensive research project, which is now underway. “The survey sample was only about 1% of all SMSFs, so it is not a true representation of SMSFs. But the full survey will take in 100,000 funds will be far more comprehensive.”
She says the results prove wrong a few misconceptions that have been bandied around by those wielding influence. The major concern is that far heavier regulation is on the way.
“I think it shows that the SMSF trustees are quite a bit more sophisticated than some people have been giving them credit for. Perhaps they are not in need of compulsory training as has been suggested. The indications are that this sector is capable of looking after itself. The members are able to look after themselves and they won’t be a drain on the public purse.
Slattery urged the Henry taxation review to take note. The survey shows that member-trustees of the SMSF market are working towards the “adequacy, longevity and sustainability” criteria that Ken Henry sees as being at the forefront of taxation arrangements for future taxation.
If there was something that should really surprise commentators, it was the cash holdings.
“The cash being held by SMSFs is less than a typical balanced fund. It proves wrong all that anecdotal rubbish that has been thrown around for a long time. This proves that is not the case,” she says.
Slattery says that while larger funds have been moving towards cash, SMSFs have been dipping their toe back in the water.
“It’s possible that a lot of the low balance funds are just taking 2-3 years to get established, not that they’re in cash because they don’t know what they’re doing.”
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.