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Is your SMSF diversified enough?

 

19 February 2019

 

 

 

 

 

 

In the face of greater limits, fund owners should be working to minimise investment risk, writes Zoe Fielding.

Despite a broad set of investment options, many SMSFs simply invest in Australian equities and cash, Australian Taxation Office figures show.

In total, SMSFs in Australia held $724.7 billion in assets in September 2018, according to the ATO. Of this, more than 30 per cent ($223 billion) was invested in listed shares and almost 24 per cent ($172 billion) was held in cash and term deposits.

By comparison, 15 per cent ($108 billion) was invested in commercial and residential property, and less than 1 per cent ($6 billion) was invested in overseas shares.

The lack of diversification in SMSF investments puts funds at risk of losses. Holding a wider range of assets can protect an overall portfolio if an individual asset class, such as Australian equities, fall in value.

Most of ANZ Private Wealth senior adviser Ross Falconer’s clients have well-diversified portfolios, but he does come across new clients whose entire portfolios are invested in cash, or cash and Australian equities.

“Although a lot of clients have the best intentions of diversifying their portfolios, quite often they get too busy to do this themselves and they end up outsourcing the investment decisions,” he says.

Falconer suggests trustees should:

  • define long-term investment goals
  • set target investment returns needed to achieve these goals
  • determine the level of risk they are willing to take.

“From there they should look at diversifying across defensive and growth assets and look beyond simply cash, shares, and property.”

This could include fixed-interest investments such as bonds and debentures, or growth assets such as private equity or infrastructure investments.

Rice Warner senior consultant Nathan Bonarius says SMSFs appear to be poorly diversified, but the situation may not be as bad as it seems.

“[ATO figures] do not look through to see where the underlying funds are invested,” he says. “For example, if the SMSF holds an exchange traded fund which is listed on the Australian Securities Exchange but which invests in international equities, the ATO data simply shows that as being an Australian share-holding.

“Some SMSF investors use Australian-listed companies that conduct most of their business in foreign markets as a way of gaining exposure to international investments,” he says.

For those investors who are uncomfortable deciding on an asset-allocation strategy and reviewing it regularly should seek advice on these matters rather than simply reducing diversification to the assets they are used to.

A recap on new super limits

Self-managed superannuation funds allow members to keep control of their investments while taking advantage of the low-tax rate applied to them.

For wealthy investors in particular, saving through super can be highly tax effective. Funds that are accumulating retirement savings pay as little as 15 per cent on contributions and investment earnings, while those that are supporting a pension pay no tax.

In the past, relatively large sums could be added to superannuation each year and there was no limit to the amount a fund could hold.

But the caps on pre-tax contributions, such as super guarantee and salary-sacrifice amounts, have been coming down for the past decade. Now, savers can add only $25,000 a year in concessional (before tax) contributions.

In July 2017, additional restrictions were introduced. Among other limitations, these cut the caps on concessional (after tax) contributions to $100,000 year, and prevented people with more than $1.6 million in super from making further contributions. The balance of funds in the tax-free pension phase was capped at $1.6 million.

SMSFs still look good to the wealthy

Regulatory change and uncertainty can be frustrating but ANZ Private Wealth senior adviser Ross Falconer says SMSFs remain attractive to wealthy clients.

“The contribution caps have meant that clients are looking at ensuring they are maximising their opportunities to get money into super through strategies such as contributing non-concessional amounts for their spouse, or super splitting, or even just getting more into super earlier to allow the benefit of compounding,” Falconer says.

SMSFs allow wealthy families to invest together as a group. They offer the opportunity to invest in assets such as business premises and alternative investments that may not be accessible through a pooled super fund.

Refundable franking credit changes to hit SMSFs

One issue getting significant attention recently is the Australian Labor Party’s proposal to remove refundable franking credits if it wins the upcoming federal election.

Such a move would disproportionately affect SMSF members, according to experts such as Rice Warner senior consultant Nathan Bonarius: “The amount of money [SMSFs] could be missing out on could be quite significant.”

Pooled super funds, unlike SMSFs, would be largely unaffected as franking credits could be used to offset other income within the fund.

Bonarius says this disparity would encourage some SMSF members to wind up their funds and move into pooled super funds.

“There are more reasons why people set up a SMSF but one of them is that you can take advantage of your tax position: participate in buybacks; get franking credits; take control over when you buy and sell your shares,” he says.

The Conversation has a useful explainer on this issue if you want to know more.

 

Zoe Fielding is a personal finance and business freelance journalist, who was formerly deputy editor of The Australian Financial Review Smart Investor magazine.

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