How self-managed super funds invest
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.