SMSFs cautioned on cash splash

Christine St Anne | 24 Oct 2012

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Christine St Anne is Morningstar's online editor.

 

Self-managed superannuation fund (SMSF) trustees still continue to hold high levels of cash despite falling cash rates. This was a key finding from the latest investor sentiment report from Investment Trends.

A similar survey in April found the "wall of cash" had grown to represent 28 per cent of total cash holdings at $133 billion. This figure also included $50 billion in excess cash, which would otherwise have been invested in other types of assets.

"With the official cash rate falling by 100 basis points since April, there was an expectation that trustees might also scale back this excess cash in favour of other assets," Investment Trends chief operating officer Eric Blewitt says.

"However, trustees continue to be willing to hold and even increase their exposure to cash as an asset class," he says.

In fact, the Investment Trends SMSF Investor Intentions Index found 18 per cent of trustees intended to further increase their exposure to cash in the coming month, while 5 per cent of them had plans to lower their allocation.

"This is clearly reflective of the ongoing concern that is prevalent among all investors," Blewitt says.

The SMSF trustees surveyed were not optimistic about the market outlook. Although one-year capital return expectations have risen since May 2012, five-year capital return expectations remained at 4 per cent.

"For these trustees, equities are not off the table by any stretch of the imagination. Around three quarters of SMSF trustees expect to increase their domestic equity exposure," Blewitt says.

However, key market concerns continue to plague the confidence levels of these trustees. Blewitt says investors remain concerned about the European debt situation and a slowing China.

Many of these trustees fear these events will have a knock-on effect on the domestic economy, according to Blewitt.

 

Value beyond cash

With unprecedented global events and market volatility, it is not surprising that confidence has taken a hit among investors and trustees.

However, it is in these markets where investors can find some terrific value.

The discrepancy between price and value is greatest in times of unprecedented market volatility, according to Morningstar head of equities research Peter Warnes. In other words, investors can pick up some quality companies at low prices.

He says a 28 per cent portfolio weighting in cash is overly bearish and SMSF trustees tend to be more conservative than professional investors such as fund managers.

Indeed, a recent report from Russell Investments found three quarters of fund managers expected a turnaround in the Australian sharemarket by December next year. Importantly, these fund managers believe such a turnaround will be sustained.

Over half of the 40 fund managers surveyed also said Australian shares were undervalued.

According to Warnes, quality companies with sustainable earnings have delivered substantially higher total returns than cash.

Warnes' analysis has shown that companies like the major banks, Telstra (TLS) and Woolworths (WOW) have generated higher total returns over the past year.

 

Investing amid falling rates

Interest rates will most likely fall. As Warnes notes, a one-year term deposit rate could fall to around 4 per cent.

However, trustees won't be getting a full 4 per cent yield. Rather, the yield will be around 2 per cent given the impact of inflation. Investing in equities, however, protects investors against inflation.

As Warnes notes in his analysis, at $4.00, Telstra yields around 10 per cent after grossing up for franking.

"This is well-ahead of the 4 per cent capital return expected by trustees and is higher than pre-tax, one-year bank term deposits," he says.

And unlike fixed-interest assets, companies can grow their earnings and dividends.

A number of companies favoured by Warnes also hold Morningstar moat ratings. A moat rating assesses the ability of a company to sustain its competitive advantage. This means a company is better positioned to maintain its earnings and therefore dividend payments.

Morningstar has also researched and developed an Australian Income Portfolio. A Special Report written by Morningstar senior resources analyst Mathew Hodge titled Aesop was right - the tortoise wins! highlights the importance of having a strong core portfolio and the benefits of applying Morningstar's consistent approach and way of thinking.

"In response to the GFC, many disillusioned investors exited the market and fled to cash. Cash has protected capital but being out of the market has been a costly decision," Hodge said in his report.

Yet if investors had maintained a consistent approach to investing, being in the market (but being selective) could have netted them good returns.

In the three years to the end of September, the Morningstar Income Portfolio returned 10 per cent per annum, compared with 1.8 per cent for the ASX 200 Accumulation Index.

The portfolio also outperformed its peer group - Australian large equity accounts. In a falling interest-rate environment, quality stocks will no doubt outperform cash.

Premium subscribers to Morningstar.com.au have full access to the details of Morningstar's Income Portfolio, as well as access to in-depth analysis on income stocks.

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

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