(03) 9020 2905PORTFOLIO POINT: There has been a ferocious shift to defensive assets in recent months. Are you leading, following, or ignoring the trend?
In a few days – November 1 – it will be four years since the top of the Australian equities market.
Investment changed on that date. Few saw it coming. But investors’ understanding of the notion of risk, over the next 15 months, changed dramatically.
Equities lost about 55% from top to bottom. Listed property trusts (now known as A-REITs) lost around 75%. It was a bruising experience for anyone invested in anything but the defensive assets of fixed interest and cash (the latter was travelling quite well at the time).
Super fund managers were about to come under intense pressure as that financial year, and the one that followed, produced dreadful returns, partly because of the sorts of mandates that most fund managers work under.
SMSFs, however, are different. There is no mandated asset allocation to follow (although you do have to set out your plan in the fund’s “investment strategy” and then follow it). But you don’t have to follow an asset allocation plan that is laid out to cater to the needs of thousands of people, or advisers who want to know what investment allocations are being followed.
SMSF trustees have only to worry about a maximum of four people.
If you lose faith in an asset or an asset class, you can get out that day. If you believe you heard the bell ring for the bottom of another market, you can pile in to it.
And, far more so than highly paid investment managers, it seems that you are doing exactly that.
A recent survey by Multiport shows SMSF trustees have made a huge swing out of growth assets and into defensives in recent months.
In the six months to the end of September, the asset allocation of SMSFs to cash and fixed interest has jumped nearly one-fifth.
Over that period, the allocation to cash jumped from 21.8% to 24.7% of all assets – an increase of around 13.3%. The bigger mover was in fixed interest, which lifted from 11% to 14.1%, an increase of 28.2% in just half a year.
Multiport provides the administration for around 1600 funds, covering about $1.3 billion in assets, so its average fund value of around $812,000 is not too far from the average SMSF as the ATO sees it.
Over the same period, shares (Australian and international) have fallen from a total of 49.8% to 43.9%, a fall of 11.9%. Property, at the same time, has increased by 4.3% from 16.1% to 16.8%.
Part of that movement is purely market related. During that time, the ASX300 fell by 15.4%. International shares (unhedged) fell 10.7% over the same period. If you did nothing with cash, then the percentage allocation of your cash holdings would have risen. But that doesn’t explain the whole movement.
Multiport stated that a portion of the shift could be attributed to SMSF trustees hoarding new cash to the fund (such as the receipt of dividend payments that were not reinvested).
“Trustees seem to have not reinvested this money in the share market due to current uncertainty and have instead kept the cash in either short or longer term deposits,’’ Multiport said.
Some of the other market reasons for the changes in asset allocations were the dramatic fall in both the Australian and international stock markets over the period.
If you add shares and property together (as growth assets) and cash and fixed interest together (as income/defensive assets), then the split moved from 65.9%/32.8% to 60.7%/38.8%. That’s a fairly significant shift.
(They don’t add up to 100%, because there is a small element in “other”, which includes hedge funds, alternatives and trusts).
Pension valuation factor?
Average contributions to funds for the quarter stood at $21,292, while benefits paid were at $35,940. Multiport said that the pension payments were “significantly higher”, but no percentage increases or decreases were given.
Multiport did remind that the minimum pension payments determined by the Government were higher – they discount to the minimum pension payments of 50% was reduced to 25% on July 1, so would have impacted in this first quarter of the new financial year.
Top Aussie stocks
The only major change to share holdings in the top 10 was that Origin Energy dropped out of the top 10 and Telstra popped back in. Telstra was one of the few stocks of the top 10 to have increased its share price over the period.
For the interests of your own comparisons, the top ten stocks in order of holding were BHP Billiton, Commonwealth Bank, Westpac, ANZ, National Australia Bank, Wesfarmers, Woolworths, Woodside, Telstra and Rio Tinto.
Property … and gearing
Multiport said gearing is increasingly taking hold in the SMSF sector and this was partly because providers were increasingly providing fully developed products to help SMSF trustees. (However, please note my concerns/warning on this topic, 10/8/11).
Property investment over the 6-month period increased from 16.1% to 16.8%
Asset class shift
But it’s certain that the shift from growth assets to defensives has been something that can’t be ignored. Multiport’s figures, any way you look at them, are significant in that they show that SMSF trustees are exercising their duties as investment managers to load up, or decrease, their holdings in individual asset classes.
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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.