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Self-directed investors should beware home bias

Glenn Freeman  |  28 Jun 2017Text size  Decrease  Increase  |  

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Global equities exposure propelled Australian corporate super funds to double-digit returns in the financial year to the end of May 2017.

 

The median balanced option returned more than 10 per cent for the financial year to May, according to figures compiled by SuperRatings. This performance has been driven by global share markets, along with support from a fall in the Australian dollar in early 2017, according to Jeff Bresnahan, chairman, SuperRatings.

"Market momentum has been strong, and in the US and Europe we are still seeing markets pushing to record highs," he says. This contrasts with Australian markets. Though the Australian Securities Exchange (ASX) derived some benefit from overseas market momentum, "we have seen a noticeable pullback, with banks the hardest hit".

Earlier this month, the ASX 200 had its largest single-day decline since November 2016--it was down 1.59 per cent on 21 June, wiping off $27 billion of market value.

Contrasting with the global exposures taken by professionally managed super funds, self-managed super funds are predominantly invested in domestic assets.

"It's well documented that SMSF investors often favour Australian blue-chip shares that promise premium dividends and franking credits," says Investment Trends head of research, wealth management, Recep Ill Peker.

Despite recent studies showing a reduced allocation to Australian shares by SMSF trustees, they remain highly concentrated in this asset class.

Australian Tax Office data from 2016 shows 39 per cent of SMSFs had a preference for Australian equities, along with a high allocation to property, and a strong preference for cash over fixed income.

In the seven years to June 2016, Australian equities returned 8.7 per cent per annum, while global equities returned 12.8 per cent over the same period.

Among Australian super funds, the five top-performing balanced funds in the fiscal year to the end of May were HOSTPLUS, First State Super, Sunsuper, Russell iQ Super Employer, and AustralianSuper. Respectively, they delivered returns of 12.4 per cent, 12.3 per cent, 12.2 per cent, 11.9 per cent and 11.8 per cent.

 

Median balanced (60-76) option monthly returns to May 2017


chart

Source: SuperRatings

 

Bresnahan points to global market performance as a key driver of these returns. Though the US market showed signs of slowing in May, "the wheels are still firmly in place".

"The S&P 500 increased 1.9 per cent, pushing to new record highs ... While rates began trending higher in October 2016 and yield curves have steepened, investors have appeared to embrace duration again, reflected in longer-term fund flows," he says.

On the flipside, the Australian market has pulled back, posting a negative 2.8 per cent return in May, with losses driven primarily by financials, which fell 7.2 per cent.

"After riding a tide of positive sentiment since November 2016--and taking the index with them--the big four banks faced something of a reckoning in May, with ANZ (ASX: ANZ) negative-11.2 per cent and Westpac (ASX: WBC) negative-9.3 per cent the hardest hit," Bresnahan says.

These declines were tempered slightly by the bond proxies, including Telstra (ASX: TLS) up 4.3 per cent and APA Group up 4.6 per cent.

An increase of 18.2 per cent saw Qantas (ASX: QAN) lead the gains in the industrials sector, followed by Sydney Airport (ASX: SYD), up 8 per cent amid speculation the Chinese government is considering a financing deal for Sydney's proposed second airport.

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Glenn Freeman is a Morningstar senior editor.

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