How self-man­aged su­per funds in­vest

The Weekend Australian - - BUSINESS REVIEW - JAMES KIRBY

What do pri­vate in­vestors ac­tu­ally in­vest in? A key piece of top-level re­search has re­vealed the best pic­ture yet on just where we put our money ... and it’s a very dif­fer­ent pic­ture than the one we’ve come to be­lieve.

Im­por­tantly, this is not just an­other sur­vey — it’s data pro­vided to the Pro­duc­tiv­ity Com­mis­sion that prompted it to “re­visit” key num­bers pre­vi­ously sup­plied by the tax of­fice. The new re­search puts an end to the widely held be­lief that lo­cal in­vestors fun­nel vir­tu­ally all their money into the ASX and cash with pre­cious lit­tle di­ver­si­fi­ca­tion else­where.

Self-man­aged su­per fund re­search is our best win­dow into the ac­tiv­i­ties of pri­vate in­vestors. When the SMSF sec­tor re­ceived the orig­i­nal PC re­port on su­per in April this year, it was well re­ceived.

But ques­tions were asked about as­set al­lo­ca­tion: were pri­vate in­vestors re­ally so in­ward look­ing as the re­port in­di­cated? Did smaller SMSFs re­ally have the game stacked against them? Were big­ger funds — such as in­dus­try funds — re­ally so far ahead of the pack in terms of di­ver­si­fi­ca­tion?

Pro­fes­sional an­a­lysts in the area that has now be­come a $759bn sec­tor use data from soft­ware spe­cial­ist Class Lim­ited. When the PC took a sec­ond look at the num­bers, it added the Class data into the mix. No sur­prise, a very dif­fer­ent pic­ture emerged that is now con­tained in a sup­ple­men­tary PC re­port on su­per (the source of the pub­lished ta­ble).

So what did the sec­ond re­view tell us that we did not al­ready know? Well, yes it would seem SMSF in­vestors do have high lev­els of cash — roughly twice as much as big­ger funds. But the num­bers also show as spu­ri­ous the no­tion lo­cal pri­vate in­vestors do not have in­ter­na­tional di­ver­si­fi­ca­tion. The al­lo­ca­tion to in­ter­na­tional shares is 5 per cent. Take note, this num­ber would have risen over the past year as more in­vestors moved into US stocks. In­de­pen­dent re­searchers put this num­ber even higher. A re­cent re­port from re­search house MST Mar­quee sug­gests that in­ter­na­tional share al­lo­ca­tion among SMSFs is as high as 11 per cent.

Sim­i­larly, the no­tion that pri­vate in­vestors sim­ply don’t use fixed-in­come prod­ucts such as bonds is knocked on the head. Class puts the al­lo­ca­tion fig­ure at 3.5 per cent on lo­cal fixed-in­come al­lo­ca­tion, which is twice as high as the ATO’s num­bers.

Sep­a­rately, there is a fig­ure of 2.6 per cent for in­ter­na­tional bonds, while the ATO sug­gests no fig­ure is avail­able. Though a string of re­ports have reg­u­larly sug­gested big funds do bet­ter than SMSF funds, the new data chal­lenges that idea. The man­age­ment at Class soft­ware says both ATO and reg­u­la­tor the Aus­tralian Pru­den­tial Reg­u­la­tory Au­thor­ity “grossly un­der­es­ti­mate” SMSF in­vest­ment re­turns.

In fact, Kevin Bur­gard, the CEO of Class, says: “If you look over the past decade, what­ever way you run the num­bers un­der ATO mea­sures or APRA mea­sures, SMSF in­vest­ment re­turns are bet­ter than big­ger funds.”

You have to be scep­ti­cal about any av­er­ages that hope to rep­re­sent the in­vest­ment per­for­mance of more than half a mil­lion SMSF funds. But for the record Class says over the past decade on ATO mea­sures the an­nual re­turns have been SMSFs on 5.5 per cent ver­sus 4.98 per cent for APRAreg­u­lated funds. On the APRA mea­sures it is SMSFs 6.71 per cent ver­sus 5.58 per cent for APRAreg­u­lated funds.

And you can bet those al­lo­ca­tion dif­fer­ences are cru­cial. High cash lev­els in the post-GFC years would have helped con­ser­va­tive SMSF op­er­a­tors avoid the worst of the down­turn. Sim­i­larly, the rel­a­tive ab­sence of pri­vate in­vestors from the bond mar­ket in re­cent times would also have been a plus. On the other hand, pri­vate in­vestors have def­i­nitely missed out on the in­fra­struc­ture boom — big funds have at least 5 per cent in in­fra­struc­ture while pri­vate in­vestors have 1.2 per cent and this pri­vate al­lo­ca­tion is con­fined to listed mar­kets — not the ideal way into this as­set class.

But then again pri­vate in­vestors can­not get into un­listed in­fra­struc­ture so it is not so much a lack of am­bi­tion as a lack of op­por­tu­nity. There is also some dis­tance to go on off­shore share di­ver­si­fi­ca­tion for pri­vate in­vestors, though it is ac­cel­er­at­ing now that on­line trad­ing has made it eas­ier.

There are good rea­sons, too, for the par­tic­u­lar bi­ases shown by pri­vate in­vestors — high cash lev­els would be needed by those in pen­sion mode for com­pul­sory draw­downs, high al­lo­ca­tions to the ASX would re­flect the at­trac­tion of Aus­tralia-only franked div­i­dends (though this may fade fast if the ALP gets in and scraps cash re­bates on frank­ing cred­its).

Re­lated is­sues will ap­pear in the al­lo­ca­tions made by big funds — fixed-in­come hold­ings are of­ten needed so the funds can pre­dict long-term re­turns with some con­fi­dence, they have to be able to pay out their clients when called upon.

Putting th­ese items to­gether, we can say now with some con­vic­tion what Aus­tralian pri­vate in­vestors ac­tu­ally in­vest in — and they are not be­ing trounced by in­dus­try funds or any­one else.

Rather, they in­vest dif­fer­ently to suit their sit­u­a­tions and the num­bers re­veal there is noth­ing wrong with do­ing that.

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