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Direct shares lose ground to ETFs, managed funds for SMSFs

Glenn Freeman  |  02 Sep 2016Text size  Decrease  Increase  |  

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Exchange-traded funds (ETFs) maintained their growth trajectory among self-managed super fund (SMSF) trustees in 2016, with an 18 per cent jump, according to a study from Investment Trends and Vanguard.

Around 220,000 SMSFs held an allocation to ETFs in March 2016, up from 202,000 in March 2015 and just 120,000 five years earlier, the survey of trustees found.

Now in its eleventh year, the study polled around 3,500 SMSF trustees nationally between February and March 2016.

The high exposure to international diversification provided by ETFs is a key driver of demand, says Recep Peker, Investment Trends' head of research.

However, he believes shortfalls in investor education and product familiarity are holding trustees back from investing more in ETFs.

"There's a really big educational opportunity, because a lot are saying, 'If there was more research around about ETFs, then I'd be more likely to invest in them,'" Peker says.

The study showed 34 per cent and 33 per cent of respondents, respectively, indicated that better ETF research and education materials would increase their likelihood of investing in ETFs.

Along with ETFs, managed funds were also filling a demand gap in providing a relatively low-risk investment vehicle for those SMSF investors experiencing a volatile and uncertain global marketplace.

The study found two in five SMSFs are intending to invest in managed funds, "but one of the things that's changing in managed funds is where trustees first learn about them," Peker says.

More are citing word-of-mouth and online resources, rather than the traditional financial adviser channels.

In addition, there is also an increase in the desire for SMSF trustees to access managed funds directly with the fund manager (39 per cent) rather than through an adviser (19 per cent), an online broker (14 per cent), an investment platform (5 per cent), a stock broker (5 per cent) or another source.

Diversification still too low

The study also found concentration risk was still a feature of Australia's SMSF market, with some 38 per cent of trustees surveyed having more than half their assets invested in direct shares.

Of these, 28 per cent held more than half of their total share portfolio in banks and other financial stocks: "SMSFs have doubled down into financials, and a lot more SMSFs are heavily focused in this sector," Peker says.

"There is also a big skew to cash and cash-related products, but not as big as product providers often expect it to be, at 11 per cent."

Residential property, another asset class that is often raised as an area of over-exposure for SMSFs, showed a much lower figure than many might have anticipated, at about 7 per cent.

Are SMSF investors bothered?

While the level of concern among SMSF trustees has been trending up over the last 12 months, they are still ready to invest their funds but are unsure which asset classes or products to use, according to the study.

Concern levels peaked in 2011-2012, when they ranked 7.5 out of 10.

"Since then, investor concerns had been trending down until about 2014, but now that's coming back," Peker says.

"We've had spikes in concern. With different market events and things happening, people's concern levels have not been immune to the shocks ... but right now, they're back where they were in the previous study, at around 6.2 out of 10.

"But their concern levels are not actually that bad. People are ready to invest, they just don't know where they want to invest.

"The things keeping them up at night are the Chinese slowdown, and the prospect of another global financial crisis."

More from Morningstar

Why SMSFs use ETFs

Understanding ETF liquidity


Glenn Freeman is Morningstar's senior editor.

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