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Most SMSFs are still poorly diversified

Data only just released by the Australian Tax Office, detailing the asset allocations for all SMSFs in the quarter to the end of June, shows there was still a large investment weighting at that time towards cash and term deposits.

   
From its COVID-inspired low point in late March, the Australian share market – as measured by the performance of the S&P/ASX 300 Index – has surged more than 40 per cent.
 
It's an impressive rebound in such a short period of time, delivering strong returns to equity investors, especially to those who have broad exposure to the Australian share market through low-cost index-tracking exchange traded funds (ETF) and managed funds.
 
But it seems many of Australia's roughly 600,000 self-managed super funds (SMSFs), covering more than 1.1 million members, have failed to capitalise on the share market's robust growth.
 
Data only just released by the Australian Tax Office, detailing the asset allocations for all SMSFs in the quarter to the end of June, shows there was still a large investment weighting at that time towards cash and term deposits.
 
In fact, cash still remains the second-biggest holding for SMSFs behind ASX-listed shares.
 
At 30 June 2020 SMSF trustees were holding around $191.5 billion in Australian shares and $156.3 billion in cash, representing 26.1 per cent and 21.3 per cent respectively of the $705.4 billion in total SMSF assets.
 
Total SMSF cash holdings were largely unchanged on the March quarter number of $156.6 billion.
 
While the value of holdings in Australian shares at the end of June was actually up considerably on the $165.3 billion total value at the end of the March quarter, that's largely explained by the 16.5 per cent rise on the local share market between 1 April and 30 June.
 
By contrast, the average returns from term deposit accounts were below 1 per cent in the June quarter, and remain so.
 

Small SMSFs have even more cash

 
The stubbornly high percentage of SMSF assets in low-yielding cash is even more evident in the ATO's data breakdown of asset distributions by fund size.
 
Its latest data has only recently been extracted, but relates to the 2018-19 financial year.
 
It shows that, on average, super funds with $1 million to $2 million had around 30 per cent of their total assets in Australian listed shares, and 23 per cent in cash and term deposits.
 
The next-largest holdings in this subset were unlisted trusts (10 per cent) and non-residential real property (8 per cent).
 
SMSFs with $500,000 to $1 million were holding around 25 per cent in listed shares and 24 per cent in cash.
 
Interestingly, the numbers started turning the other way in smaller SMSFs. Those with between $200,000 and $500,000 in assets were holding around 23 per cent in listed Australian shares and an even larger 29 per cent in cash.
 
The smaller the amount of assets, the higher amount of cash.
 
For SMSFs between $100,000 and $200,000, the average holdings were 23 per cent in Australian-listed shares and 42 per cent in cash. And, for funds holding between $50,000 and $100,000 in super assets, the numbers were 23 per cent in Australian-listed shares and 45 per cent in cash.
 

Lack of diversification

 
Another observation from the ATO's data is that many SMSFs are generally not well diversified into other major asset classes, including international equities and fixed interest.
 
Unlisted trusts, which by and large represent unitised unlisted property securities, are third-highest in terms of total SMSF assets, accounting for around $86 billion of capital (11.7 per cent).
 
Commercial properties account for more than $73 billion in SMSF assets.
 
Overseas shares, which accounted for $7.7 billion of total SMSF assets at the end of June, rank outside of the top 10.
 
The table below shows the top 10 holdings represent almost 100 per cent of the assets held by SMSFs.
 

Top 10 SMSF Asset Allocations at 30 June 2020

Asset class Amount ($m) % of total SMSF assets
Listed shares 191,464 26.1
Cash and term deposits 156,278 21.3
Unlisted trusts 85,752 11.7
Non-residential real property 73,493 10.0
Limited recourse borrowing arrangements 50,234 6.8
Listed trusts 43,330 5.9
Residential real property 39,100 5.3
Other managed investments 37,700 5.1
Other assets 19,352 2.6
Debt securities 11,525 1.6
Total 708,228 96.4

Source: Australian Tax Office

 

The ATO's crackdown on SMSF strategies

 
The overweighting by SMSF trustees into Australian shares, cash and illiquid assets such as property has been on the ATO's radar for some time.
 
In late February the SMSF regulator released new guidance for trustees around what should be detailed in their fund's written investment strategy.
 
The ATO specifically wants to know from trustees how the asset allocations they make from their super fund assets supports their investment approach towards achieving their retirement goals.
 
For funds with too much asset concentration risk, trustees must justify their lack of diversification and how they believe this will achieve their overall goals.
 

Taking a broader view

 
While share markets have rebounded since March, ongoing uncertainty over COVID, the US election and other situations will ensure equity markets remain volatile over the short-to-medium term.
 
At the same time record low interest rates will ensure ongoing poor yields from cash holdings, meaning those with large cash balances needing to generate income may need to consider other types of investment assets.
 
Diversification to offset risks across different asset classes is one of the key elements of every investment strategy.
 
The latest ATO asset allocation data once again illustrates that many SMSF trustees should be taking a broader investment approach.
 
It may be prudent for some SMSFs trustees, especially those with large cash balances earning near-zero per cent returns, to consider consulting a licensed financial adviser to discuss their investment strategy.
 
 
 

Tony Kaye
20 Oct, 2020
vanguardinvestments.com.au

 


David Forrest Download David's Adviser Profile

David Forrest

Director
BEc (Acc), MBA, CPA, FFin

David has been in the Financial Services Industry for nearly 30 years. He was one of the founding Directors of the successful Financial Planning and Stockbroking Practice, Henderson Gregory Forrest, for a decade. Prior to that, he held senior roles in companies such as ING, KPMG Accountants and AMP. David was previously Chairman of OAMPS Superannuation Trustee Board and currently serves as an independent Board Director for several companies.

David’s extensive experience in all forms of superannuation, including Self Managed Super Funds (SMSF), Defined Benefit Funds, retirement funding through Account Based Pensions, stockbroking with a focus on Direct Share Investment, Taxation/Remuneration Planning, Centrelink, Aged Care and business management, equip him to advise expertly on all aspects of Financial Advice.

Those with a particular interest in superannuation/SMSFs, direct share investment, salary packaging or applying for the Centrelink Pension will find his knowledge and ability in formulating and implementing creative, logical and simple wealth creation strategies a valuable asset.

David maintains a strong personalised client service focus, providing tailored solutions for clients.

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David Forrest is an Authorised Representative of Integrity Financial (SA) Pty Ltd ABN 16 133 921 187 — AFSL No 334846

Michelle Forrest

Michelle Forrest

Business Finance Manager
B Bus (Acc), CPA

Michelle’s career has spanned across the Financial Services, Retirement Living and Aged Care industries working in the private sector, not for profit and more recently with the state government for over 20 years. Her experience extends to many facets of the financial services industry, having worked in superannuation administration, technical support and financial planning practice administration.

Commencing with AMP and subsequently working in commerce and accounting roles with companies such as Brambles, Adelaide Bank Retirement Services, ECH Inc and SA Health and Wellbeing, Michelle returns to financial services after working in practice financial management at Henderson Gregory Forrest. This wide range of experience from senior accounting and management roles has provided Michelle with a strong background in business administration.

With an astute financial acumen and keen interest in business improvement strategies, Michelle ensures the smooth running of the Integrity Financial Advisory practice providing valued management support to our personalised client service focus.

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Darren Chalk Download Darren's Adviser Profile

Darren Chalk

Financial Adviser
B Com, Dip FP

Darren joins the Integrity team as a strong technical specialist with almost 20 years’ in the Financial Services industry. He has extensive experience advising clients on how to build and protect wealth, prepare for retirement and retire comfortably.

Commencing with advising clients on direct equities for over 10 years at Baker Young, Tolhurst Noall, and ABN AMRO Morgans, his career expanded to providing holistic client advice, having operated his own financial services licence and company. Most recently having worked for a 'Big 4' bank, he has welcomed the more personalised ‘client first’ approach that is evident at Integrity Financial Advisory.

With a deep understanding of investment markets, he is appropriately qualified and authorised to provide direct share advice, as well as superannuation/SMSF advice, encompassing both investments and insurance.

Meticulous in his approach, he aims to deliver quality outcomes for clients by understanding their financial situation and needs before providing advice which is central to our advice process. Darren supports David in tailoring solutions for all client financial advice needs.

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Darren Chalk is an Authorised Representative of Integrity Financial (SA) Pty Ltd ABN 16 133 921 187 — AFSL No 334846

Natasha Bartlett

Natasha Bartlett

Client Service Manager

Natasha commenced working in the financial services industry in June 2008 and is a new addition to the Integrity team. During the past 11 years, she worked closely with advisers providing administration support in a share broking and financial advice business.

Having successfully completed her RG146 accreditation in securities and managed investments and continued her studies to complete her competency in Superannuation, Natasha can ably assist with all aspects of fixed interest, cash management, portfolio administration, direct shares and client advice implementation.

Natasha takes time to ensure she understands our client’s financial goals and needs and believes in creating, preserving and utilising wealth through effective financial management as a key objective in helping clients.

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Kelly Collins

Kelly Collins

Client Service Manager

Kelly has worked in the Financial Services Industry for over 10 years and has supported David since 2013. Kelly’s primary background is in customer service and administration.

On starting in the industry, Kelly initially focused on direct shares, stockbroking administration and client liaison. Since moving to the Client Service Manager role, Kelly has developed skills encompassing all aspects of financial planning including client advice implementation and term deposit management.

Kelly’s experience in the direct share environment, especially management of estates, provides a key part of the direct equity expertise in Integrity’s Client Service Team.

Returning from Parental Leave following the arrival of her second child, Kelly has developed further honed multi-tasking skills after juggling the demands of a growing family.

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Jasmine Smith

Jasmine Smith

Client Service Manager

Jasmine has worked in the financial services industry for over 12 years in all areas of client administration, working with David since 2013.

Jasmine has extensive knowledge and experience in client service including implementation of advice, portfolio reporting, assisting with the establishment of Self Managed Super Funds (SMSFs), term deposit management and a long history of helping clients with their enquiries.

Jasmine’s attention to detail, yet gentle approach, means she is able to solve the trickiest of questions for our client community.

Jasmine has gained her Certificate III in Financial Services qualification.

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Merrilyn Smith

Merrilyn Smith

Client Service Manager

Merrilyn has worked in the financial services industry for over 11 years in all areas of client administration, and is a new addition to our client services team, returning from Melbourne to join the team in June 2019.

Merrilyn has extensive knowledge and experience in client service including implementation of advice, managed fund administration, assisting with the establishment of Self Managed Super Funds (SMSFs) and process improvement for the previous practices she has worked with. Merrilyn’s experience with direct shares constitutes the other part of our administrative support for direct equity investments.

Merrilyn’s warm and caring nature continues to endear her to our clients and she has already established herself as a valued member of our team.

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