Market volatility spurs SMSF investment changes

Glenn Freeman | 10 Aug 2017

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While SMSF trustees' market return expectations remain subdued, prolonged uncertainty is inspiring greater asset allocation activity, a Vanguard and Investment Trends study shows.

 

"Over the last year, depending on what's been happening out there, investors' return expectations have been very sensitive to events in the market and in the news," says Recep Ill Peker, research director, Investment Trends.

Now in its seventh iteration, the 2017 Vanguard/Investment Trends SMSF Report is an online study of 3,000 self-managed super fund (SMSF) trustees, who were surveyed in February and March this year.

Peker refers to the Brexit effect, when SMSF investors' return expectations for the Australian market fell to 1.7 per cent in July 2016--the lowest since 2011. Capital gain expectations improved in the second half of 2016, to peak at 5.3 per cent, before again dipping in the aftermath of Donald Trump's election as President of the United States.

"Just over two in five SMSFs were saying the top worry they have in relation to their investments inside their SMSF is the new White House administration, what happens in the United States, and what that might do to their portfolio ... some have taken a bullish view, some have taken a bearish view, but return expectations overall remain subdued," Peker says.

"If you look at how this has affected their portfolios, what we find is that for many SMSFs, these events over the last 12 months have gotten their money to move," he says. The number of SMSF trustees who say they made a substantial change to their asset allocation is at the highest level ever seen in the history of the study.

Many respondents opted for a more defensive asset allocation, with 114,000 trustees indicating they were making such a change in 2017, up from 107,000 a year earlier. However, a higher increase was seen among those intending to increase their investment risk, with 57,000 trustees adopting a more aggressive stance, up from 37,000 in 2016.

"The bigger growth was seen among those who took a more aggressive view. Some saw opportunities in everything that was going on," says Peker.

Diversification dilemma

The study finds the distribution of SMSF assets across different asset classes and investment vehicles has remained relatively unchanged since 2016, with allocations towards cash continuing to push up gradually.

Around 37 per cent of SMSF assets are held in direct shares, followed by cash (26 per cent), managed funds (10 per cent), and residential property (7 per cent). On average, commercial or business property account for 4 per cent of asset allocation, on a par with listed investment companies and alternatives, followed by ETFs, hybrid securities, and REITs (3 per cent).

"We've seen a gradual improvement in the diversification of SMSF portfolios over several years, but a clear bias towards the local share market and property persist," says Robin Bowerman, head of market strategy and communications, Vanguard Australia.

The study showed 55 per cent of SMSF trustees had more than half their total portfolio invested in a single investment type, down from 60 per cent in 2016.

"When you dig into the detail within this, for example within direct shares, you find that the portion who have over half their total portfolio in bank and financial stocks has reduced from 28 per cent to 23 per cent. So not only is there less concentration at an asset class level, but also at a sector level, which is a healthy outcome for SMSF trustees," Investment Trends' Peker says.

Another key shift was in the area of trustees' pursuit of growth versus income, which is a reversal of last year, when more respondents favoured investment income over growth. "This makes sense because there are more SMSFs out there seeing opportunities, and no one wants to sit in cash in a low interest rate environment ... to achieve their goals, they need to take on a bit more risk," Peker says.

Fewer SMSF trustees were interested in picking individual blue-chip shares--down to 52 per cent in 2017 from 55 per cent a year earlier and more than 70 per cent in 2014--with the appetite for high-yielding shares still quite low at around 25 per cent.

The demand for ETFs among respondents increased substantially, with more than 20 per cent of planning to use them in their SMSF in the next 12 months--up from around 18 per cent in the 2016 study.

Resource stocks and property are also back in favour, with 12 per cent and 8 per cent of respondents, respectively, intending to increase exposure here. This is up from 8 per cent and 6 per cent in 2016.

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Glenn Freeman is a Morningstar senior editor.

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This report appeared on www.morningstar.com.au 2017 Morningstar Australasia Pty Limited

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.