(03) 9020 2905SUMMARY: The power wielded by Australia’s SMSF sector is growing. Will we use that power wisely, or just in individual self-interest?
When it comes to throwing its weight around, there is one super fund that can put quakes and quivers into the spines of board directors globally.
CalPERS, the California Public Employees’ Retirement System, can pressure and coerce huge global companies (including our own BHP Billiton recently) when it doesn’t like a decision, direction or policy.
The public sector fund manages more than $280 billion, but it is the super fund for just one US state. (By comparison, Australia’s own Future Fund is worth about $92 billion.)
UniSuper is also making its $30 billion count, with a threat to derail Westfield Group’s split of its Australasian and international operations. UniSuper holds 7.27% of Westfield Retail Trust and doesn’t like the deal, claiming the multiple being requested for WRT to purchase Westfield Group’s ANZ management and development business.
But it’s not just the big guys who move markets or change investment decisions.
Australia’s SMSF market is fast proving that weight of numbers, and similar, if not co-ordinated, investment policies, can have the same impact.
Global merchant bank Credit Suisse warned last week that investment decisions being made by SMSFs are distorting investment markets. They have gone to the extent of making some recommendations to investors to not get offside, or out of whack, with Australia’s single largest superannuation player.
First, Credit Suisse argues, accept that SMSFs have their favourites, which include the likes of Australia’s banks and Telstra, so don’t short those stocks. Second, dividend yields are precious to SMSFs, so high-yielding stocks, or those likely to increase their payouts, are ones to watch.
And, as a result, be aware that SMSFs are not necessarily interested in financing growth stocks.
Union heavyweight Paul Howes, of the AWU, has also voiced concerns about the power of SMSFs, particularly as it relates to property investment. This comes at a time when there is a threat to the governance of APRA-regulated funds.
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As Alan Kohler pointed out on 19/1/14, the chase for yield has been running so long now that it has to, surely, be close to coming to an end. Rising equity prices will eventually make high-yielding stocks come back to middling yields. Something else will take it’s place. It could be mining, energy or cyclical stocks. Or something else completely.
But what’s far more interesting is to find out what you’ve been doing, as an indication of where you believe returns lie. (And I haven’t gone into great depth on that for a while.) The following stats are from the latest ATO SMSF statistical data.
SMSFs have been loading up on equities. When the Australian market bottomed in the March quarter of 2009, SMSFs were holding just $77 billion worth of domestic equities. That has risen 123% to $171.8 billion at the end of September 2013.
The Australian market itself only put on around 40% during that time (though that figure does not directly include the reinvestment of dividends). Over and above any growth in listed securities, SMSFs are expected to tip another $8 billion a year into the local bourse.
The amount invested in international shares has risen from $651 million to $2.08 billion over the same period. That is a more than tripling of exposure to that asset class over the same period, suggesting at least some SMSFs have heard calls that they are woefully underinvested in this asset class.
Cash is one of the asset classes in SMSFs that rarely, if ever, seems to go backwards, not even to plough money into equities when prices are low.
In March 2009, you were holding $95.2 billion in cash, which has grown steadily to $154.1 million in the September 2013 quarter.
Residential property has grown from a touch over $11 billion to $18.6 billion. Hardly the explosion in this asset class that many have feared with the advent of being able to borrow to purchase properties.
Limited recourse borrowing arrangements (LRBAs) grew from $497 million in June 2009 to $2.62 billion in September 2013. While this is a five-fold increase, it needs to be put in the context that SMSF borrowing (outside of instalment warrants and internally geared funds) really only became an opportunity for SMSFs in September 2007 and, due to the debt market crisis, not really until early 2010.
Between June 2009 and September 2013, total borrowings in SMSFs increased from approximately $4.8 billion to $11 billion.
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Australia’s SMSF sector is now more than 509,000 in number, with nearly one million members. The rate of growth is not slowing. They will continue to increase in prominence, in importance and in influence.
But their very nature means they operate individually and without a mandate that stretches beyond their own membership of no more than four. That’s the way they like it. And the reason the majority of them took control in the first place.
While many trustees will have plenty in common with others, they are individual funds, with individual balances, interests and targets.
They will rarely act as a bloc, preferring instead their own self-interest. Because there’s no-one more interested in the best outcome for their members than they are as trustees. But that doesn’t mean that much of their own personal interest won’t see large numbers of them investing similarly.
They will, increasingly, impact on investment markets. And it would be wise not to bet against us.
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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 strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au