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How managed funds can smooth your SMSF risk exposure

Glenn Freeman  |  29 Jul 2016Text size  Decrease  Increase  |  

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Many self-managed super funds are highly inefficient, with an overexposure to cash, property and domestic equities providing insufficient diversification, increasing risk and hampering performance.

"If you look at SMSFs, most of them over the last few years have underperformed--when you look at the risk and return, these SMSFs have got almost double the risk of a diversified growth managed fund," says Robin Bowerman, head of market strategy and communications, Vanguard Australia.

A study of 3,941 SMSFs conducted by Investment Trends in October 2015 indicated most of them were "a long way up the risk curve, but below the return they should expect, given the risk they're taking".

"They're right where they don't want to be--down on the return level, but up on the risk side," Bowerman says.

He points to a chart created by Vanguard, which models the surveyed SMSF investors relative to a standard hypothetical efficient frontier.



Source: Vanguard, Bloomberg, and FactSet Oct 2015


He says this is particularly concerning, given that around 49 per cent of the SMSF sector is currently in the superannuation draw-down phase.

"So as the baby boomer demographic comes through, more people are going to be more concerned about the risk of capital loss, because they don't have the ability to replenish it."

The study indicates the average SMSF holds around 40 per cent of the total assets in equities, spread across an average of just 18 direct shares, 10 per cent in property and a large proportion in cash.

"International assets makes up less than 5 per cent of the total SMSF universe, and that includes things like managed funds, ETFs and separately managed accounts," says King Loong Choi, senior analyst, Investment Trends.

An over-reliance on direct investments is a key reason for this, with retail investors deterred from buying foreign company shares because of greater complexity, brokerage costs and a lack of local knowledge, according to Bowerman.

"What we see with direct investors is that they're very comfortable buying Australian shares ... they're comfortable with those companies, those brand names," he says.

"When you suddenly look to the US, and yes you might know Apple, Microsoft and some of the others, but a lot of the companies Australians don't know, and don't have a feel for whether it's a good buy or overvalued.

"I think that's where the pooled investment vehicle becomes a more practical way of doing it [investing]."

Using managed funds in your SMSF

According to Bowerman, many SMSF investors use managed funds in their portfolio to provide a sector or style tilt, possibly providing a focus on value, yield or growth.

"The managed fund, by its nature as a pooled investment, they get the diversification benefit from it," he says.

Others will use one managed fund as a core of diversified equities exposure, and another to provide a more specific investment exposure.

"What we see a lot with SMSFs particularly is people will have a certain amount in the index core, maybe 30-40 per cent in the index market, and then they will take specific shares, like bank shares, resources, international shares, and structure their portfolio around that," Bowerman says.

"On the managed fund side, the most common matching of funds we see is people using the Vanguard International Shares [5398] with a Platinum fund.

"They're buying the whole market with the first, and then expressing a view with more of a high-conviction fund manager."

Self-managed, not micro-managed

Some SMSF trustees and commentators suggest that managed funds run counter to the self-directed ethos, with investors paying additional fees and handing some control to professional fund managers in the process of accessing managed funds.

"Just because people want to have direct control doesn't mean they have to directly do everything themselves.," Bowerman says.

"When it comes to things like international shares, or fixed income, I think people realise they can't get that directly.

"If you're trying to do that as an individual investor, you're looking at transactions costs of around $80 to $100 in brokerage fees per share. It's expensive to set up your own brokerage account, plus you get tax complications et cetera."

On the other hand, he says that by using a managed fund, investors can access a portfolio that has "hundreds if not thousands of companies in it".

Only around 9 per cent of total SMSF assets were allocated to managed funds in Investment Trends' most recent study, conducted in 2015, but this increased from 6 per cent in 2012.

In terms of the proportion of total SMSFs, 35 per cent of SMSFs held managed funds in 2013. This number had grown to 43 per cent in last year's study, and Investment Trends' Loong Choi expects it will have grown further in the next study, which is due for completion in August 2016.

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Glenn Freeman is a senior editor at Morningstar.

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