SMSFs direct share love affair

Vanguard | 24 July 2013


Vanguard and Investment Trends release comprehensive new research on SMSF investors

Key points:

  • SMSF assets grew to $496 billion in the year to March 2013 representing 32 per cent of the overall super industry.
  • Asset allocation study highlights room for improvement with large skew towards direct share investment and cash neglecting potential cost and diversification issues.
  • SMSF investors continue to drive growth in ETF investment.

SYDNEY 24 July 2013: Vanguard and Investment Trends released the results of the April 2013 Self Managed Super Fund Report today, providing a comprehensive look under the bonnet of the largest superannuation sector in Australia.

The Self Managed Super Fund (SMSF) sector now represents 32 per cent of superannuation industry in Australia, growing to $496 billion in assets. One third of SMSFs are now valued at over $1 million, and together control 73 per cent of all SMSF assets.

Fieldwork for the report was conducted in March and April of 2013 and the research which represents a survey of almost 2000 SMSF trustees uncovers detailed analysis of how SMSF trustees are constructing their portfolios and who they are consulting for advice and assistance with administration.

Asset allocation

The findings report 35 per cent of SMSF investors made substantial asset allocation changes in the past year with 39 per cent of those looking to be more defensive, while 26 per cent did so to be more aggressive in their asset allocation.

Allocations to cash fell for the first time since 2010, comprising 26 per cent of total SMSF assets, down from 28 per cent last year. Allocations to direct shares increased by 5 per cent to now make up 45 per cent of investors' portfolios. On average SMSFs hold 18 different direct shares in their portfolio, with 30 per cent trading shares at least once a month.

The total amount sitting in cash was $140 billion, of which $46 billion is classified as excess cash (or cash that would normally be invested in other investments but for recent market volatility). This excess cash figure has fallen by $4 billion since the previous study. 83 per cent of investors say that when they do decide to invest their excess cash, they will use some of it to invest in direct shares.

8 per cent of SMSFs now hold ETFs in their portfolio, making up about 1 per cent of total SMSF investments. The number of SMSF investors holding ETFs has increased by 28 per cent over the past 12 months (to April 2013). The study also shows a 54 per cent increase in the number of SMSFs intending to invest in ETFs in the coming year. The vast majority of SMSFs who invest in ETFs use broadly diversified Australian and international equity ETFs.

Only three in 10 SMSFs are currently invested or intend to invest in fixed income in the future.

Robin Bowerman, Head of Market Strategy and Communication said "SMSF investors are clearly demonstrating a strong preference for directly investing in shares and cash"

"While the focus on Australian shares is understandable, it points to investors focusing on specific shares and tax or income outcomes and not taking a strategic asset allocation view of their portfolio. That means SMSF investors may not fully appreciate the risks and the costs involved in holding a concentrated portfolio of direct shares.

"There is a stark difference between large institutional super funds and SMSFs in the way they construct portfolios. Professional institutional investors typically begin with the asset allocation decisions. It is a straightforward comparison to make and a way SMSF trustees can benchmark themselves not just on performance but also on risk.

"When it comes to risk, SMSFs shouldn't discount the importance of fixed income as part of a strategic defensive investment - term deposits should be viewed as a short term savings vehicle rather than a long term defensive investment given they don't offer the same negative correlation to equities.

"Fixed income may be out of favour as an asset class at the moment but for a long term investor it performs an important role which cash doesn't provide, which is to offset the volatility of equity markets and provide a steady income".

Use of advisers

The 2013 survey showed satisfaction with advisers has improved across every area measured, and 83 per cent now rate their main adviser as good or very good overall, up from 76 per cent in 2012. Most of the improvement is driven by the proportion who rate their adviser as "very good" (44 per cent, up from 29 per cent).

This study reconfirms the fact that SMSFs use financial advice to complement their investment decision making rather than delegating the full process.

218,000 SMSFs report that they have unmet advice needs, and are willing to spend an average of $2,000 p.a. each to meet these needs. Major advice gaps included inheritance & estate planning, borrowing within the SMSF and buying distressed or undervalued assets.

Over a third of SMSFs said they currently use an accountant only for tax advice but 45 per cent of these said they would consider also using them for investment advice if they offered it. This is significant given accountants' expectations following recent licensing reforms.

"This points to the need for both accountants and advisers to have specialist skills and training to properly service these investors" said Mr Bowerman.

Next wave of SMSFs

The report this year also considered recent SMSF set ups and the next generation of SMSF investors looking at trends in reasons for establishing their fund.

Control, investing in property via super, saving fees, and the belief that they would make better decisions than their super fund were the top five reasons given for intending to switch into an SMSF in the next 12 months.

42 per cent of this next wave of SMSF investors say that they would consider staying with their existing super fund if fees were lower.

"These investors are clearly very cost conscious and unwilling to pay where they don't see value. The message seems loud and clear to the industry, equally for professional managers, super funds and advisers. Having a very clear value proposition to justify costs charged is critically important to attracting SMSF investors" said Mr Bowerman.