SMSF appetite for international exposure strengthens

Vanguard | 30 July 2014


Vanguard and Investment Trends released the annual results of the 2014 Self Managed Super Fund Report today, taking a detailed look at key drivers and challenges for Australian SMSF investors.

The SMSF sector now represents more than 30 per cent of the superannuation industry in Australia and continues to grow with assets increasing 13 per cent to $559 billion in the year to March 2014. With more than 49 per cent of SMSFs in pension or drawdown phase, compared with 17 per cent for industry super funds, this sector of the superannuation system is blazing a trail in terms of managing retirement incomes.

The report is based on a survey of 2,163 SMSF investors and offers a comprehensive view of the sector—presenting detailed analysis about the changes to how SMSF portfolios are constructed, the increased appetite for international exposure and the growing proportion of investors willing to pay for unmet advice needs.

International exposure 
Reflecting rising confidence levels among investors, the intention to invest in international shares by SMSFs almost doubled over the past 12 months to 22 percent (up from 12 per cent in April 2013).

However, common blockers to international exposure include:

  • Insufficient knowledge of overseas markets (40 per cent)
  • Currency risk (34 per cent)
  • Lack of franking credits (33 per cent)

Professionally managed investments can help address many of the common blockers, so it's not surprising to see a growing proportion of SMSFs who currently invest in ETFs said access to international markets is a key driver.

Commenting on the report, Robin Bowerman, Vanguard's Head of Market Strategy & Communications, said:

"It is clear that SMSF investors are looking to increase their exposure to international markets.

"The increased focus on international investing is valuable in a diversification sense however, we are cautious when key international markets like the U.S. sharemarket have had such strong performance in the past year and hope that advisers and investors are taking a long-term view because too often we see investors disappointed when chasing future returns based on recent past performance."

Asset allocation 
Over a quarter of SMSFs (27 per cent, up from 14 per cent) of SMSFs who made a substantial asset allocation change in the last 12 months did so to increase diversification.

Allocation to direct shares by SMSFs remained steady over the past 12 months (44 per cent of total SMSF assets, edging down from 45 per cent) while their allocation to cash declined to 23 per cent, down from 26 per cent. There was also an increase in the use of managed funds and the average investment by SMSFs who hold managed funds is now $210,000 which is a 23 per cent increase up from $170,000 in 2013.

The number of SMSFs holding ETFs has increased 41 per cent to 53,500 in the 12 months to April 2014 explaining, in part at least, the strong growth in the Australian ETF market which has recently passed $11.7 billion in assets.

The number of SMSFs planning to invest in ETFs for the first time in the coming year has jumped by 76 per cent to 58,000.

"ETFs offer SMSFs great tools with which to implement their portfolio's asset allocation. They allow SMSFs the ability to access a market or market segment at a low cost, to diversify risk or implement a core-satellite strategy.

"Against a background of strong market returns separate portfolio research carried out by Vanguard's Investment Strategy Group shows that SMSFs have a starkly different risk profile than that of institutional superannuation funds.

"If SMSF trustees appreciate the level of risk in their portfolio that is great. Our concern is that some SMSFs may feel they are investing conservatively where the analysis shows that they may have quite high levels of concentration and market risk within their portfolios.

"Investors should focus on developing an appropriate asset allocation mix consistent with realistic risk-and-return expectations," said Mr. Bowerman.

Specialist administration 
The Investment Trends research shows in 2014 approximately 150,000 SMSFs (a significant increase from 115,000 in 2013) are administered by specialist SMSF services. Annual tax reporting and audits (54 per cent) and low fees (45 per cent) were the most commonly cited drivers of selecting a specialist administration provider.

"Understandably, super fund costs remain a concern for investors and are a key driver behind the increase in the establishment of SMSFs. Naturally, during periods of flat or negative super fund returns, the number of new SMSFs being established will increase.

"While control always tops the list of reasons for establishing a SMSF Vanguard believes an underlying reason for the growth of SMSFs in the past five years is investors looking to cut the fees they pay superannuation funds.

"The interim report by the Financial System Inquiry raises the question about costs within the Australian super system. That is a debate we must have because in Vanguard's view the growth in the system to $1.8 trillion of retirement savings has not delivered the lower costs you could expect from such economies of scale" said Mr. Bowerman.