Australia’s $326 billion self-managed superannuation fund (SMSF) sector is moving strongly back into the sharemarket.

According to super portfolio administration, reporting and compliance service provider Multiport, the typical SMSF has lifted its Australian shares weighting from 31.9 per cent at 31 December 2008 to 42.6 per cent at 31 December 2009.

And the SMSFs still have a sizeable cash kitty that can be expected to flow into the sharemarket given greater confidence in market stability, says Multiport chief executive John McIlroy.

“When you consider that the average SMSF still has cash of about $190,000 ready to invest, there is room for further substantial changes in market participation if greater stability is seen in share markets,” he says.

McIlroy says the major changes in SMSF asset allocation over the past two years have been the increased level of cash holdings in SMSFs, and the halving of their exposure to international equities.

Cash holdings went from 12.6 per cent at 31 December 2007 to as high as 29 per cent at 30 June 2009, but have decreased to 21.9 per cent at December 2009 as funds have returned to the sharemarket. International equities make up 7.3 per cent of the typical SMSF’s portfolio, down from 13.7 per cent at December 2007.

The top ten most commonly held Australian shares were BHP Billiton, Commonwealth Bank, Westpac, ANZ, National Australia Bank, Woodside, Wesfarmers, Woolworths, Rio Tinto and Telstra. McIlroy says that on average these ten stocks represent almost 16 per cent of all SMSF assets.

Russell Medcraft, certified financial planner and chief executive officer of specialist SMSF advisory firm the Self Managed Super Institute, says most SMSF holders understand that the sharemarket’s long-term track record of capital growth is a valuable ally in their task of building retirement wealth. “Particularly in accumulation mode they need to have a hefty component of shares working for them, but shares are also very handy in pension mode as well,” he says.

Medcraft says the federal government’s action in the Budget last year to halve the amount of concessional (before-tax) contributions that could be made tax-effectively to super made the 10-12 per cent long-term returns from the sharemarket even more important.

Since July 2009, people under 50 can only make $25,000 of concessional contributions (from their employer, their own salary-sacrifice or any personal contributions for which they claim a tax deduction) a year to their super; people 50 or over can contribute $50,000.

“People simply need more bang for their buck in terms of performance from their super. They can’t put as much in so they need to make sure what they can put in is generating as high a return for reasonable risk as they can get, which is where the sharemarket comes in. And with the best-quality shares, you also get a flow of fully franked dividends, which can come in very handy in terms of tax-effective income,” says Medcraft.

SMSFs also need to lift their allocation to international equities, he says, to tap into the expected strong performance of overseas markets, particularly China and the emerging markets. “SMSFs haven’t done international very well, because they’ve mostly used fund managers, many of which are expensive and have not out-performed their benchmark. In fact at our SMSF advisory business, Financial Choice, we would say that no matter what the asset class, less than 20 per cent of managed funds manage to beat their benchmark.

“Managed funds are becoming redundant: we think that exchange-traded funds (ETFs) are a much better way for SMSFs to get a good variety of exposures efficiently and cheaply, because you can get exposure to whatever market you like with one transaction. We use them as the basic building block of the portfolio.”

Financial Choice’s approach uses model SMSF portfolios comprising ETFs and some direct shares to achieve outperformance. The conservative portfolio is 70 per cent invested in term deposits, direct preference shares, government bonds and fixed interest securities – Medcraft looks for yields of up to 8 per cent – and 30 per cent in shares. A moderate-risk ‘balanced’ portfolio decreases the cash weighting to 30 per cent, while for a SMSF prepared to embrace risk, Financial Choice recommends an equities exposure of 95-100 per cent, with 5 per cent cash for tax and expenses.

Medcraft says that for international exposure, with the higher Australian dollar, ETFs (which are unhedged) offer SMSF investors the ideal way to access indices such as the Asian Top 50 and the S&P Global 500.

“I want to keep it simple, I don’t want to complicate it, and ETFs give me that. It’s a breath of fresh air for advisers, because they’re not going to be corrupted by conflicts of interest on platforms. Financial planners historically have used platforms to access institutional mandates for international equities exposure, but the fees – particularly performance fees – are too high, even before you consider the questionable methodology of the benchmarks they use. The bottom line is that all up, an SMSF with its international equities exposure sitting on a platform is probably paying 2.58 per cent a year: ETFs cost 0.8 per cent a year on average.”

This year, Medcraft expects to see an increase in gearing on the part of SMSFs – because of the problem of contributions caps. “For people to squeeze more money into their fund, and make what’s in there work harder, they’re going to have to gear. I don’t necessarily agree with that, but we see more and more clients wanting to go down that track. Just before Christmas, Commonwealth Bank came out with a SMSF gearing package, called Supergear, which is a very simple and cost-effective process: CBA does all the legal and the financing for 0.8 per cent of the loan value.”

St George and Macquarie have been very active in the SMSF gearing area, says Medcraft, but CBA is the first major to come out with an A-Z gearing package. “When you have a big bank like CBA coming out and putting a  package together, I think that indicates that there will be a lot of activity in this space this year,” he says.

Model SMSF Portfolios (Investment Amount $300,000)

Source: Financial Choice

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