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SMSFs and Crypto: Cranking up the risk in retirement portfolios

Emma Rapaport  |  02 Oct 2021Text size  Decrease  Increase  |  
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Self-managed super funds are often viewed as trailblazers, the early adopters and the first to jump on product innovations.

If you thought 'young people' were the first to get behind exchange-traded funds, you'd be wrong. Trustees of SMSFs were there a decade ago, frustrated by the inaccessibility and expense associated with investing in global markets.

This week, my colleague Lewis Jackson spoke with two SMSF trustees – one in his 40s who claims to have almost all his retirement savings in Bitcoin, another in his 30s with half invested in cryptocurrencies. The former strongly believes crypto-based payments is the future and a safe haven from the decline of fiat currency.

SMSFs are not a homogenous group. The sector has over 1.1 million members spread across 600,000 funds. It's not surprising that a fringe element believes the revolution is coming, but are we witnessing a trend in the making? Research from crypto-exchange BTC markets shows trustees are increasingly exposing their portfolios to digital currencies, reporting a 95% increase in trustees using the platform in fiscal 2021. The average portfolio size rose 145%. And as new platforms entice younger and younger investors to "take control of their super", offering cheap setup and access to crypto-trading, significant growth is on the horizon.

Merits of a crypto-based investment strategy aside, its growth is a reminder of the incredible freedoms afforded to SMSFs. Boats, wine, artworks, manuscripts, sports memorabilia – SMSFs can invest in almost anything so long as its purpose is to provide retirement benefits for members and the purchase remains at arm's length. Members are not supposed to derive enjoyment from hanging the art in the lounge room or taking the Ferrari for a spin.

MORE ON THIS TOPIC: Does Your Portfolio Need Bitcoin?

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While I don't take issue with dabbing in collectibles, if there is investment merit, when large sums on money earmarked for retirement are invested in high-risk assets classes like cryptocurrency, I question whether the objective of superannuation is being met. Remember, these are tax-shielded safety nets established with the primary purpose of providing Australians with a means to retire, not another pool of money to speculate with. Having reasonable practices in place to prevent this sort of yahooism will protect the entire SMSF industry from the ire of the regulator and the threat of regulation. Yes, trustees must prepare and implement an investment strategy, with specific reference to diversification, but this doesn't preclude single-asset class investing nor highly volatile strategies. Luckily for the sector, SMSFs have just been excluded from the retirement income covenant, so crypto's lack of income generation won't be under scrutiny.

Trends come and go, and the cycles seem to be quickening. We're seeing evidence the "meme-stock" phenomenon of early-2021 will fade to a distant memory as Robinhood records a drop in the number of active users and app downloads. While there will be a portion of investors who tap out at the next crypto-crash, there is an undercurrent of distrust in traditional financial markets among the "set-and-forget" crypto-crowd that just wasn't there with GameStop. These trustees are flying very close to the sun. If this trend continues to grow, I wouldn't be surprised if regulators come down hard.

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It’s finally happened. After watching house prices surge around 20% in a year in many parts of Australia, Treasurer Josh Frydenberg has given the strongest indication that action to control rampaging prices and potential financial instability threats is coming. What levers is he going to pull? Morningstar analysts expect the Australian Prudential Regulation Authority will introduce macro-prudential measures to slow the rise in high debt/income loans in the coming months.

"We believe the most likely regulatory restrictions will be a cap on the percentage of loans with a debt/income level above 6 times, and/or an increase in serviceability floors. More than 20% of new loans are being written at a debt/income ratio above 6 times, this is up from less than 15% in early 2020."

For views on this issue, we turn to Graham Hand in Firstlinks, who covered off this topic in his editorial note and an article on '10 ways to cool rampant housing prices'. Morningstar's Nathan Zaia looks at how a clampdown could negatively impact overall credit growth at Australia's bank.

Elsewhere, the news is once again filled with headlines about a legislative logjam in the US Congress that threatens to leave the United States unable to pay its debts, shut down the government and destabilise the economy and the markets. Should investors be concerned about this political brinkmanship? Tom Lauricella looks to history to find out.

Australian wine distributor Treasury Wine Estates was rocked last year after China’s Ministry of Commerce slapped a 175.6% tariff on Australian wine. But a pivot to other markets has helped keep earnings flat writes Lewis Jackson.

Finally, Peter Warnes is back in the saddle after a two-week break. His mind was on Australia's soaring house prices, rising bond yields and supply chain disruption.

Despite the end of month window dressing, the S&P/ASX 200 will close in September with a loss of around 3%, ending an impressive 11 consecutive months of gains. Warnes is betting on a volatile October.

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is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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