Jeffrey Hutton: Self-managed super funds; they make up third of the superannuation industry and they are only going to get bigger. So 2012, what are the big issues they need to be thinking about. Well, Andrew Baker joins us from Perpetual to talk about just that.

Andrew thanks of joining us.

Andrew Baker: Thank you, Jeff.

Hutton: So Andrew, how do you account for the popularity of DIY Super?

Baker: We've seen a huge growth in the self-managed super funds, participants over the past few years and I think, given that the turmoil out of GFC and the experience that people had, I think at the heart of it, it is about flexibility and control, and again that transparency. So, many will do it all themselves, many might seek assistance with certain aspects of the running of a fund compliance or administration. But at the end of day it's their call, so it's not a product that they are in necessarily, it's a structure that's their own. So, I think it's that that's driving that behavior.

Hutton: This year concessional caps are the lowering of them to 25,000 is going to be a big issue, right?

Baker: Wall Street's very important to take advantage of all of those strategic opportunities and the caps being of vey high profile one. It does in fact need to fit into your strategic goals and objectives that you've set for short, medium and long-term. So, it's not just about sort of rushing in and taking advantage of the caps, it's about saying 'does that fit into my strategy?, have I got my cash flows mapped for the year?'.

Its $25,000 and I mean a pre-tax or salary sacrificing that can be very powerful. But I think you did see some of that behavior in 2007 around the $1 million opportunity. So, putting money into super is one thing, but making sure that it's going to be efficiently invested is perhaps another. So, you do need to look at it holistically and not just sort of react to a deadline.

Hutton: That's all about the plan, isn't that right?

Baker: That's right and really understanding, what's the opportunity cost if I don't do it. So, if I'm not going to take that opportunity, what are the opportunities costs for me not doing that.

Hutton: That point you are making about the $1 million contribution, what was lesson of that?

Baker: If people were making contributions to super and not really thinking about the actual way that that was invested, they experienced severe loss of capital. So, if you adjust sort of piling significant amounts of money on top of your existing investment strategy without really considering that - do you see what I mean? You are separating strategic and tax issues from investment.

Some products, if you put money in it just basically sweeps across the investments that you are already in. Again with sort of breaking apart strategy from investment, you are able to say, well okay I can make the contribution but I might allocate it to cash as opposed to being in for a penny, in for a pound to that existing investment strategy.

Hutton: So, cash balances for the past couple of years have risen, I think to about 30% or so, those were the latest figures. Should trustees be moving out of cash and reallocating?

Baker: Well look, I mean, I think there's cash and then there's cash and fixed interest, and cash fixed interest and international fixed interest. Look, it's certainly been a consolidating program that many have gone through and waiting for investment markets to hit some level of perceived or real recovery before allocating through. Again, it comes back to the fundamentals: you really need to make sure you've allocated for short-term expenditure; you've got any capital expenditure in play. They're the must haves, understanding those decisions, understanding what you need, before you can start to say well should I start to reallocate.

Once you've gone through that process of figuring out what you do need in cash from a liquidity perspective and start to move to the portfolio, we'll sure, that's when asset allocation needs to come to the fore. What are we telling our clients? It's a balance of making sure that we don't make any rash decisions. It's about understanding what your true risk profile is, going through the GFC on your own or with an advisor, what was your actual behavior? What did you do? What did you feel? It's understanding those questions, and answers to those questions, which will then drive well, do we retire in the current asset allocation and risk profile or do we change?

Even if you retire in the current asset allocation and risk profile that you have, yet you need to then test what's going on in underlying investments within that risk profile. So, alternative investments, direct property, which we do believe smoothes return, reduces risk. Let's face it, the Australian investment community has a love affair with Australian shares, and you've got a couple of big names in that ASX top 50 that carry huge amount of risk in many people's portfolio. Again, I think it comes back to fundamentals and not sort of, I guess, bowing to people's popular opinion, which is as soon as I see some opportunity in the ASX, I'll dive back in there, because I don't like this asset class and I don't like that asset class. It's not a prudent approach.

Hutton: Andrew, I suppose the point that I'm trying to get at is, are people going to continue to be risk-averse or will appetite for risk improve?

Baker: Yeah. Look, I think there is a couple of things in play. I think clients do understand that bring in cash for ever is not going to achieve their goals and objectives. So, they are starting to head back in and probably six or eight months ago it was when we started to see people moving back in. But interestingly seeing people head back into international assets was very interesting. And, I mean we've always stuck to our guns from our recommendations point of view, but saying clients more open to that I think the currency helped.

Whilst we very much have their own views on asset allocation and investment selection, we also respond to our clients requests and particularly the high net worth space, they kin of know what they want, where their interests lying, and that's the space. Australian equities, looked they have remained very strong throughout. So, we will see rebalancing into Australian equities, but I think most of the clients that we've had experienced with have retained those allocations. They were very, very loathed to sell down those positions.

Hutton: So, what are the big bumps coming up in 2012, I suppose Europe will be one of them?

Baker: We do see tough times in Europe, there is no doubt about it and particularly potential recession. However, whether that will have the impact or massive impact that some people are saying, not sure. We do see the U.S. actually starting to improve. So, no recession in the U.S. really is our view. Then Australian markets, well some research is showing potential 10% returns and coming back to good growth and income.

What we do think though is that portfolio construction will be very much about income, and that's a bit of a change to the sort of addiction to growth that many have had in investment markets really over the past several years. We don't see huge growth being the driver of investment decisions. It needs to come back again to fundamentals, which is, what is this investment going to yield me? Which should also then drive the value of that - price of that asset, over the longer term.

Hutton: Andrew Baker, thanks a lot for joining us.

Baker: No problem. Thanks very much, Jeff.