How SMSFs are Investing

Move toward global equities in portfolios, via ASX, gathers pace.

For global investors, 2017 was a top-performing year, with most of the major world indices posting double-digit gains. The Dow Jones Industrial Average was up 25.2 per cent and the S&P 500 19.7 per cent.

With global share market capitalization steadily heading towards $100 trillion, many self-managed super fund (SMSF) investors are sitting up and taking notice of offshore performance, seeking opportunities to diversify outside the Australian market by investing in exchange-traded funds (ETFs), listed investment companies (LICs) and mFunds.

Advised SMSFs are more diversified

Trading analysis of data across the Bell Direct platforms shows some marked differences between the investment preferences of advised versus self-directed SMSFs.

The Bell Direct Investment Barometer shows that advised SMSF portfolios continue to be more diverse than self-directed SMSFs and are shifting some of their allocation from direct equities at a faster rate.

The table below provides a quick snapshot:

* Includes warrants, floating-rate notes, convertible preference securities, convertible notes

The shift is from Australian-domicile direct equities to products that provide access to a wider range of locations and assets, namely ETFs. There are some obvious reasons for this. Although the Australian share market has performed well in recent decades and offers attractive income-generation features such as franking credits, it is relatively small on a global scale, accounting for just over 2 per cent in December 2017. 

Also, ASX is dominated by a small number of large companies in the financials (32.7 per cent) and materials (18.8 per cent) sectors, with the top 20 stocks comprising almost half the market capitalization.

By comparison, the MSCI World Index offers access to 23 developed markets (see chart below) and a much broader range of sectors, the largest being information technology (18.47 per cent), financials (17.11 per cent), consumer discretionary (12.8 per cent) and healthcare (11.89 per cent).

As such, many SMSFs have acted to shift portfolios towards a more globally minded and diversified portfolio (often using ASX-listed products for global equities exposure).

“Many self-managed super fund (SMSF) investors are sitting up and taking notice of offshore performance”

Source: MSCI World Index

The growing number of ETFs, LICs and funds on ASX enable investors to increase their portfolio diversification by tapping into new markets and less-traditional high-growth sectors such as robotics, aerospace and IT.

Some of the best-performing global stocks in 2017 were in these sectors. Tesla, for instance, was up 47 per cent, Facebook posted gains of more than 50 per cent and flash storage provider Micron delivered an impressive 101 per cent.

A weakening Australian dollar has also provided impetus for many advisers to look offshore to maximize investment gains.

Self-directed SMSFs slower to respond

The figures indicate that self-directed SMSFs have been slower to respond to the constant calls for portfolio diversification, even increasing their allocation to Australian-domiciled direct equities to 84.39 per cent as of April this year. Of this, 40.25 per cent was allocated to financials, 14.8 per cent to materials, 9.0 per cent to healthcare and 6.9 per cent to consumer staples.

With more than 70 per cent of the direct equity allocation reliant on just four sectors, self-directed SMSF portfolios are exposing themselves to significant portfolio risk. 

A reason for this increasing lack of diversification could be the time it takes to effectively run an SMSF. According to Investment Trends in March, SMSF trustees spent about 8.4 hours a month managing their fund, up from 6.3 hours in 2014. With so much time being consumed by fund administration, it is easy to see why so many SMSFs are exposed to portfolio concentration risk.

It is often said that strategic asset allocation is responsible for 80 per cent of overall portfolio performance. Ultimately, this is the key driver behind the retirement outcomes an SMSF can derive over its lifetime.

As a rule of thumb, SMSF trustees should spend most of their investing time researching and managing overall performance. For most, this is where the value add is and the rationale for setting up an SMSF in the first place.

Lifting the net performance of a median-size SMSF of $630,000 even by half a per cent can provide investors with an extra $3,150 a year – before compounded interest. This is more than double the cost of an average digital administration solution.

Learnings for all SMSF investors

The Bell Direct Investment Barometer should serve as a base for self-directed and advised SMSF trustees to review and compare their current asset allocation.

In our view, a well-diversified SMSF portfolio should strike a balance between direct equities, passive low-cost index funds and professionally managed active funds (which can be easily accessed and managed through funds). The key is to balance the performance of the SMSF portfolio with the risk profile of the members while minimizing the underlying total cost of running the portfolio.

A key component of these choices is also the transition for an SMSF from accumulation to pension phase. As it moves closer to pension phase the asset allocation should be more focused on capital protection rather than purely growth.

There are certainly enough investment and product choices available on ASX to facilitate both greater SMSF portfolio diversification and better risk-adjusted returns, so now is the time to act.

Arnie Selvarajah, CEO of Bell Direct.