The threats and opportunities of SMSFs
Australia’s self-managed super fund sector is a unique beast. Home to a third of Australia’s pension fund money and growing strongly, these are investor-directed funds that are completely run by members. That means all investment and administration decisions are made by the members themselves, who are often husband and wife professional workers or business owners.
About A$474bn ($487bn), a considerable chunk of Australia’s A$1.4trn pension fund sector, is held by these 478,000 funds. The SMSFs have proven an enormous threat to the retail and industry/non-profit pension funds, and are increasingly proving alluring for members with large fund balances who want to control their investments themselves.
Rainmaker Group’s Director of Research Alex Dunnin says: “Regular funds have finally figured out that they need to accept SMSFs as legitimate participants in the superannuation landscape. This means they need to work with them for clients where SMSFs are a good solution, for example, offering investment services or trying to acquire SMSF administration capability.”
The retail sector now seems to be waking up to an opportunity. AMP has established AMP SMSF. Initially not aligned with its financial adviser strategy, it is now selling an SMSF administrative and compliance service offering as a way to complement its traditional financial advice service. The word is clients have asked for it. Commonwealth Bank is also overhauling its popular superannuation cash account and online share trading platform which allows investors to buy shares directly in Australian listed companies. Its new My Wealth online platform is now offering direct purchasing of various fixed interest and exchange-traded fund products covering listed property trusts and bonds and will target superannuation customers.
This is the new world, where SMSF trustees are becoming more confident and starting to look at diversifying outside of their standard bank term deposits, real property and listed Australian equity holdings. Australian Taxation Office data for December 2012 shows the funds had A$135bn in cash and term deposits, A$150bn in listed equities, and A$70bn in real property. Many funds, up to 12% of the SMSF sector, simply hold one asset in their fund and that is usually property.
SMSFs currently hold A$135bn in cash and term deposits, a hangover from the global financial crisis (GFC) and ensuing share market wipe-out. The GFC saw the SMSFs rapidly move to the safety of cash and deposits with the ‘Big Four’ banks, which were helped by a government guarantee aimed at avoiding a run on savings.
The amount of cash and term deposit holdings in these funds has been described as a “wall of cash” and this “wall” may be moving out of defensives and into growth assets this year. The Russell Investments/SPAA report into SMSFs in February said 2013 would be the year of “asset migration” for SMSFs, as the funds moved their investments out of cash and into other assets.
SMSFs have A$43bn invested in unlisted trusts and there are fears this sector has become unattractive to cost-conscious and empowered SMSF investors who may increasingly be approaching managed funds through their listed ETF variations. AMP’s Multiport survey of 1,900 funds published this February for the December 2012 quarter again reflected a continued decline in the use of managed funds. International Equities were again the exception where the majority of investments are done via managed funds.
The Australian Stock Exchange’s (ASX) 2010 Share Ownership Study similarly showed the proportion of SMSFs investing in unlisted managed funds declined from 46% in 2006, to 38% in 2008 and to 16% in 2010.
In terms of where money is going, the Multiport February 2013 survey showed SMSF cash holdings decreased quite significantly with SMSF trustees moving cash into fixed interest assets – specifically term deposits – to lock in higher interest rates prior to two official interest rate cuts in the quarter. The rest of the cash outflow in the quarter was used to pay deposits on properties.
Australian-listed equities allocation also showed up as higher than expected from normal growth in the market, largely driven by the significant weight that these SMSFs direct Australian-listed equity holdings have in the top 20 ASX shares.
But the good news for the funds management industry is that there is evidence SMSFs are willing to increase the risk they take in their portfolios and it remains to be seen which investment approaches will become the most attractive as the funds move their assets in search of growth.
Research house Investment Trends says its SMSF investment intentions data for January through to March 2013 shows the funds are increasingly likely to be moving money out of cash and into shares this year. Findings from its February 2013 SMSF Investor Intentions Index, based on the responses of over 800 investors, shows that Australian SMSF investors’ concern level with the situation in the financial markets had fallen to a 41-month low.
One beneficiary may be exchange traded funds which can be easily bought and sold and add the diversification of a managed fund without the cost. Investment in ETFs by these funds has been described as slow, and overall, the amount invested in ETFs in Australia at A$6bn is minuscule compared with the size of the ETF sectors overseas.
But December 2012 figures show global behemoth Vanguard’s total Australian ETF funds under management grew from A$351m in 2011 to A$636m at the end of December 2012. Multiport said the majority of ETFs currently used by SMSFs in Australia were for access to international equities.
Dunnin says SMSFs are now an accepted part of the superannuation sector but they don’t outperform in all cases. “SMSFs are being oversold as there is often a veiled implication that they outperform no matter what – which is misleading advertising because there is no evidence for that at all.”
A December 2012 Rainmaker report found that SMSF out-performance against retail and industry super funds only really began with balances over A$500,000 and above.