(03) 9020 2905PORTFOLIO POINT: Almost uninterrupted turbulence in global investment markets had no impact on the growth of DIY super funds. In fact, they might have fertilised it.
SMSF trustees started out this financial year in a superb position – with great wads of cash at their disposal.
Despite a year of unpredictable volatility in global investment markets, includingAustralia’s market which has lost as much as 35%,Australia’s DIY trustees were sitting on a large and growing stash of liquid assets, totalling nearly $100 billion.
The latest Australian Tax Office statistics show DIY super funds’ cash balance (made up of cash, debt securities and term deposits) was sitting at $97.2 billion at June 30. That was an increase in the asset class of nearly 217% over four years, making it the fastest growing asset sector over that period.
In the last 12 months alone, the increase in the cash balance was approximately $12.3 billion, or 14.5%. There are three obvious reasons for the increase. Firstly, money continues to pour in from contributions, come rain, hail or shine. Second, it was during a period of rising interest rates for cash investments, asAustraliahad four interest rate increases from the Reserve Bank, meaning the returns on cash were none too shabby. And thirdly, sharemarkets were slumping, so money was being held on the sidelines rather than being invested.
Cash continues to be the second biggest individual asset class for SMSFs, behind listed shares and equities. But with the market shenanigans in September, it was quite likely that cash became the biggest asset class (if only temporarily, or unless trustees plunged back in to pick up potentially underpriced stocks).
The ATO data showed the appeal of the DIY sector continues to pull in people in their droves. The number of funds opened during the most recent financial year was approximately 31,660, with the number of closures being just 669, leaving a net positive establishment of SMSFs at nearly 31,000.
The growth in the number of funds in the 2007-08 year follows the record start-ups from the previous year, which was a direct flow on from the simplification of the super rules and the one-off $1 million non-concessional contribution limit.
It appears there has been a permanent uptick in interest in the DIY option followingPeterCostello’s reforms. While there was a great rush ahead ofJune 30, 2007, when more than 40,000 funds were opened, the number opened in the 2007-08 financial year is considerably higher than the 2004-05, 2005-06 and 2006-07 financial years.
The total number of SMSFs inAustralianow stands at nearly 388,000, an increase of nearly 8% over the previous year. Membership grew slightly faster and now stands at more than 746,000, an increase of 9%.
| Jun–04 | Jun–05 | Jun–06 | Jun–07 | Jun–08 |
| Establishments | 30,266 | 22,606 | 24,217 | 44,661 | 31,660 |
| Wind ups | 4,819 | 5,023 | 4,931 | 4,080 | 669 |
| Net establishments | 25,447 | 17,583 | 19,286 | 40,581 | 30,991 |
| Total number of SMSFs | 279,495 | 297,078 | 316,364 | 356,945 | 387,936 |
| Total members of SMSFs | 539,514 | 573,095 | 609,213 | 684,577 | 746,318 |
Source: ATO
However, it wasn’t all increasing numbers for SMSFs. As could be expected, equities were a bit of a problem area.
After increasing from $30.7 billion in June 2004 to $116.1 billion in June 2007, the total in listed shares and equities fell to $109.9 billion in June 2008.
That statistic on its own doesn’t say anything about the investment performance of SMSF trustees. The ATO stats only measure the actual weight of the money that’s in each investment asset class, not performance. This is important because there is, in general, a constant flow of new funds coming in to the funds themselves, care of concessional and non-concessional contributions. While a large number of SMSFs are in pension phase, the dollars going in definitely outweigh the dollars coming out through pensions.
For an idea of general performance, however, investment house Lonsec reported that the relevant indices saw Australian shares down 13.67%, international shares off 20.84% and property the worst performer with losses of 36.35%. With managed fund super, this lead to the majority of balanced managed fund super being down between 5 and 8 per cent, depending on how much exposure they had to those asset classes.
But not so in the SMSF sector. Total assets being held by DIY trustees stood at $358 billion, an increase of $23.3 billion for the year.
| Jun–04 | Jun–05 | Jun–06 | Jun–07 | Sep–07 | Dec–07 | Mar–08 | Jun–08 |
| Life insurance policies | 345 | 293 | 283 | 268 | 277 | 278 | 261 | 269 |
| Other managed investments | 7,944 | 10,208 | 13,937 | 20,572 | 21,794 | 22,287 | 22,724 | 23,396 |
| Overseas assets | 859 | 1,078 | 1,541 | 2,322 | 2,497 | 2,471 | 2,164 | 2,198 |
| Real property | 15,593 | 18,970 | 22,891 | 35,534 | 37,904 | 40,654 | 42,135 | 43,799 |
| Other property | 634 | 746 | 850 | 1,005 | 1,029 | 1,056 | 1,090 | 1,138 |
| Listed shares & equities | 41,367 | 54,125 | 71,923 | 116,069 | 124,800 | 123,518 | 108,159 | 109,880 |
| Unlisted shares & equities | 2,420 | 2,903 | 3,661 | 4,986 | 5,361 | 5,306 | 4,646 | 4,720 |
| Public trusts | 14,100 | 18,248 | 23,919 | 34,965 | 37,447 | 38,613 | 36,915 | 37,938 |
| Other trusts | 14,046 | 16,931 | 19,831 | 24,022 | 25,727 | 26,528 | 25,361 | 26,064 |
| Cash, debt securities and term deposits | 30,687 | 37,686 | 46,689 | 84,894 | 87,328 | 89,988 | 93,088 | 97,214 |
| Loans | 1,244 | 1,384 | 1,465 | 1,693 | 1,732 | 1,778 | 1,836 | 1,917 |
| Other | 3,272 | 4,473 | 5,851 | 8,596 | 8,796 | 9,029 | 9,322 | 9,734 |
| Total direct assets | 124,222 | 156,545 | 198,620 | 314,088 | 332,622 | 338,940 | 324,717 | 334,604 |
| Total assets ($m) | 132,510 | 167,046 | 212,840 | 334,927 | 354,693 | 361,505 | 347,702 | 358,269 |
Source: ATO
The overall increase is even more surprising in light of the overall fall in direct equities.
In total,Australia’s SMSF sector peaked in the December quarter last year at $361.5 billion. During the March quarter, there was a $14 billion fall in the total value of SMSF investments. But there was a quick bounce back to $358.3 billion byJune.
So, as the trustee of your own SMSF, how does your asset classes stand out? How do you compare to the sum total of all those SMSF trustees around you? The following table outlines the total investments above as percentages.
| Asset class | % |
| Life insurance policies | 0.08 |
| Other managed investments | 6.53 |
| Overseas assets | 0.61 |
| Real property | 12.22 |
| Other property | 0.32 |
| Listed shares & equities | 30.67 |
| Unlisted shares & equities | 1.31 |
| Public trusts | 10.59 |
| Other trusts | 7.27 |
| Cash, debt securities and term deposits | 27.13 |
| Loans | 0.54 |
| Other | 2.72 |
Sourced from ATO statistics.
The ATO’s stats also show that there has not been a significant change in the number of members per fund. But there have been major increases in the average size of funds.
The average SMSF held $938,315 in assets at the end of the 2007 financial year, which the average for each member’s funds was $489,247. Both of these figures were just a percent or two shy of having doubled in three years, since the end of the 2004 financial year.
The big question that’s hanging over trustees heads at the moment is: what to do with all that cash?
With the market plumbing three-year lows this week, is it time to plough some of it in some of it back in the market? Or is the cash return appealing enough? While it’s attractive at the moment, cash’s top returns might not last long. Economists are now lining up to suggest that the Reserve Bank might need to go 50 basis point cut to official cash rates next month and as much as 150 basis points worth of falls over the next year.
Bruce Brammall is a senior financial adviser with Stantins Financial Services (hyperlink, please).