(03) 9020 2905PORTFOLIO POINT: The primary investment driver of SMSF trustees has changed. Has it taken hold of you?
Some shifts in direction are subtle, like a cruise liner slowly changing its course. Some are not. Like a politician back-pedalling on a broken election promise.
There was something you, as SMSF trustees, underwent last year that would have to be classified as “in the grey area”. A bit in-between.
It certainly wouldn’t be classified as “subtle”. But because it was so understandable, it could hardly be classified as a shock. Still, it marks a change in how you invest, why you invest, what you’re investing in and how long you might be investing for.
“Risk reduction” has stormed to the fore as being the most important consideration when deciding where to invest, according to new in-depth research.
The report – by Russell Investments for the Self-Managed Superannuation Funds Professionals Association of Australia – says that the reduction in risk has overtaken traditional investment considerations, such as cost of investment and returns on investment.
Risk reduction, according to Russell/SPAA, has been shown up by some marked attitudinal changes to investment asset classes between the 2010 and 2011 years.
While SMSFs have always held a strong leaning towards two particular asset classes – Australian shares and Australian cash – the reasons for doing so have changed.
“While in 2010, trustees were waiting for a better investment option, in 2011 the primary driver is risk reduction,” the survey found.
Nearly half (48.9%) of investors and trustees have overweighted on cash because it is now seen as the most appropriate asset class to achieve risk reduction.
But the percentage “waiting for a better investment option” has fallen from 52% to 44.3%. Those that think that equities are too volatile has nearly doubled from 17% to 32.4%. And those that believe that cash can return better than equities has also lifted significantly, from 14.8% to 20.5%.
Where that has showed up in actual investment allocations isn’t quite as decisive, but still speaks a few words. Allocations to Australian equities has actually increased marginally from 42.6% to 43.5%, but Australian cash has increased from 23.1% to 25.6% (an increase of 11.1% of original allocation).
(What isn’t shown necessarily in these figures is what was happening to equities during that time. It’s possible even the small increase in shares could be attributable to market movements. Unfortunately, we don’t know the timing.)
“So strong is the focus on risk reduction that cost and return have become much lesser drivers of allocation this year compared to last year,” the report said.
What does this mean for you? If you’ve been hoarding cash, have been too scared to invest, have been wanting to get in but haven’t quite been convinced of the benefit, then you now know you’re not alone and why.
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While you’re moving to cash and likely to keep it there in a general sense, the report raised an issue over the asset allocations of SMSFs, pre- and post-retirement.
Their specific concern? That there is no difference between how you invest before and after retirement. You’re not backing off the accelerator during those years when classic investment theory (the older you get, the less you can afford to risk, therefore the more you should have in cash) says you should.
It’s true that pension funds require greater liquidity, which should see trustees holding greater amounts in cash and fixed interest.
And while this won’t be a surprise for some, who are used to doing much of the running of their fund by themselves, the report suggests trustees are likely to have greater demand for what is referred to “scoped advice”.
That is, a lot more trustees are going to dip in and dip out with their advisers on requests for advice, based on short-term or educational needs, rather than getting advisers to look after the SMSF lock, stock and barrel.
Two other trends have emerged in recent years according to the survey, which show where the likely future continued growth in pure SMSF numbers are likely to come from – women and Generation Xers.
Women have a greater need for super help. It’s well documented that average super balances for women are considerably less than the average man, so women are going to have greater needs for advice to help make up for this difference in super savings.
The number of women covered by super has been increasing, as have their relative balances in relation to men, the report found.
SMSFs have a potentially greater role for them to increase their super savings, because of the flexibility DIY funds provide, as well as the superior control aspects of SMSFs.
And Generation Xers – those aged roughly from 30 to 45 – are the real growth sector. Unfortunately, they tend not to have the dollars in their accounts yet to make advice models work for either themselves or the potential advisers, but that’s not going to stop them.
Gen Xers are beginning to take to SMSFs, even though their average balances would normally seem a little short of what’s considered a healthy level on a cost trade off (which is generally perceived to be $200,000).
Nearly 14% of Gen Xers are intending to start a SMSF within the next two years (and 10% of Gen Y is considering it also). Of those that do have SMSFs, nearly 43% of Gen Xers in the survey had balances below $150,000.
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One very interesting number the report does try to quantify is the amount of money that is NOT in the super system BECAUSE of the changes to contribution limits introduced by the Rudd and Gillard Governments.
The reduction in contribution caps was designed to reduce the amount “top-end” participants could contribute to super. And it registers above $10 billion.
“Around two in five SMSF trustees would have contributed on average an extra $64,875 each to their SMSF if the contribution cap limits were raised, equating to a collective contribution of $12.4 billion,” the report said.
“This is slightly lower than last year’s $15.1 billion, suggesting the global economic turmoil has affected people’s willingness to invest. This reduction will significantly impact Government’s objectives of adequacy and building a national investment pool.”
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.