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SMSF research highlights the need for diversification, opportunity for advice

Vanguard | 10 August 2016


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Market volatility and uncertainty have had a marked impact on how Australians with self-managed superannuation funds (SMSFs) approach investing, according to the nation's most comprehensive research into SMSF trustees and their advisers.

Launched by Vanguard and Investment Trends in Sydney today, the 2016 Vanguard/Investment Trends Self-Managed Super Fund Reports collate responses from more than 3500 SMSF trustees and 570 financial planners who advise SMSFs, providing a comprehensive view of how SMSFs are investing and how they interact with advisers.

The SMSF sector represented around $595 billion in retirement savings as at December 2015, compared to $1.4 trillion invested with APRA-regulated super funds. The total number of SMSFs grew to 567,000 by the start of this year, up 4.8 per cent over 12 months. The average SMSF balance was $1.2 million, with more than 77 per cent of funds worth more than $1 million.

Thirty-six per cent of trustees said their main investment goal for their SMSF was to build a sustainable income stream, while 50 per cent wanted at least some capital growth for their portfolio.

SMSFs cool on direct equities, hunt for yield

Investment Trends Head of Research, Wealth Management, Recep III Peker, said that although many SMSF trustees still favoured Australian equities, this year's survey revealed a dampened outlook for domestic shares.

"It's well documented that SMSF investors often favour Australian blue-chip shares that promise premium dividends and franking credits. But this year we saw trustees' appetite for buying high-yielding direct shares fall," Mr Peker said.

"Parallel to a drop in appetite for direct Australian shares, we recorded more interest in actively managed funds, infrastructure and REITs. In previous years, we have seen increased interest in fixed income products during volatile times. With interest rates at all-time lows, the data suggests SMSFs are favouring assets that they see as helping them diversify their portfolio."

Direct equities as a share of SMSF portfolios has fallen to 38 per cent on average, compared to a peak of 45 per cent in 2013. Over the same time period, managed funds have increased from seven to ten per cent of SMSF portfolios, and exchange-traded funds have been gaining ground on more established investment vehicles to make up three per cent of SMSF holdings.

Home bias endures, but more appetite for global opportunities

Despite the reduced allocation to Australian shares, SMSF portfolios remain highly concentrated in this asset class.

The 38 per cent share of an SMSF's portfolio represented by direct Australian share holdings includes an average of only 18 individual shares. This concentration is further exacerbated by concentrated sector exposure, with 28 per cent of SMSFs noting that more than half of their share portfolio is made up of financial shares.

Despite concerns among SMSF trustees about lower potential returns, Vanguard Australia Head of Market Strategy, Robin Bowerman, said Vanguard's outlook for global equities while cautious was not bearish, and noted the diversification benefits of international exposure.

"This year's research shows that many trustees are nervous about volatility generally, with increasing concern about a slowdown in China and global debt levels. While Vanguard's Investment Strategy Group is forecasting returns to be lower than historical averages for the next decade, SMSFs shouldn't be too disheartened by that outlook," Mr Bowerman said.

"While forecast returns are lower, that is tempered by low inflation expectations. We expect patient investors with portfolios that are broadly diversified will be rewarded with steady growth over the long run.

"What is positive from this year's research is that SMSF investors are looking to achieve more international diversification through exchange-traded funds. But there is more work to be done by planners and fund managers both highlighting the benefits of international diversification and how ETFs can help investors access those markets at a lower cost."

Ninety thousand SMSFs hold ETFs with 64 per cent saying easy access to overseas markets was a key motivation for investing in these vehicles. Of the 38,000 trustees who said they intend to start investing in ETFs in the coming 12 months, 40 per cent said they would do so to gain index exposure to international equities, while 25 per cent said they would use Australian equities index ETFs.

Accountants' growing role in financial advice

The number of SMSF trustees with unmet financial advice needs rose from 212,000 to 255,000 over the last 12 months.

"Consistent with previous years, trustees have noted inheritance and estate planning, pension strategies, Age Pension, and longevity risk as key areas where they have unmet advice needs," Mr Peker said.

"This year we have also seen investment strategy review and identifying undervalued assets as topics of increased interest for trustees, as well as selection of ETFs. In the current environment of market uncertainty and softer expectations for domestic investments, it's no surprise to see trustees wanting professional help in validating their investment strategies and portfolio construction."

Over the 12 months covered by the report, 37 per cent of SMSFs used a financial planner. This slight increase from last year represents the first uptick in SMSF's use of planners since 2007.

The amount of business that planners derive from SMSF clients has remained steady at 19 per cent of total revenue, however, planners continue to be positive about the potential to grow this to an average of 27 per cent over the next three years. The total proportion of financial planners who work with SMSF clients also remained steady for the year at 69 per cent.

Vanguard Australia Head of Distribution, Michael Lovett, commented that under new licensing rules the roles of accountants and financial advisers were evolving.

"This year's report showed the ongoing challenge for advisers to find and retain new SMSF clients. What Vanguard is seeing in the market, and reflected in this research, is accountants who already have deep SMSF relationships are looking to extend their offering into some areas of advice," Mr Lovett said.

"This research, which spans 12 years, has highlighted areas of unmet advice for SMSF trustees, with a clear focus on areas outside their investment strategy.

"The impact of recent changes to the licensing rules covering the areas where accountants can – and cannot – advise clients is beginning to be felt.

"When you consider that nearly half of these trustees say they would turn to an accountant for parts of this advice, it becomes clear that financial advisers need to work more closely and potentially under different arrangements that better reflect the new licensing regime."