SMSF assets hit record, but funds still hoarding cash
A rise in the number of SMSFs and their assets to all-time highs in the June quarter 2016 highlights the appeal of do-it-yourself investing for many Australians.
But SMSFs are still piling a considerable amount of money into cash, which may reduce wealth-creation investment opportunities over the long term.
A record 577,236 SMSFs existed in Australia as at 30 June 2016, up from 570,689 as at 31 March 2016, according to the latest ATO statistics. Those funds had over 1 million members in June; 1,087,841 to be exact.
SMSFs held $621.7 billion in assets as at 30 June 2016, up 2.7 per cent from $607.1 billion in the March quarter, according to the ATO data. Their assets accounted for around 30 per cent of the total superannuation asset pool of $2.1 trillion. So it’s a huge sector and growing rapidly.
While the trend is a positive sign for retirement savers, the ATO data also reveals the danger of going it entirely alone. Many SMSFs remain totally unguided in their investment decisions and appear to still have a huge amount of their assets invested in cash.
SMSFs’ holdings of cash and term deposits rose to a record high of $158.9 billion in the June quarter, up from $157.3 billion in the March quarter. Cash investments now represent 26 per cent of total SMSF assets.
The danger of having around one-quarter of your assets in cash is that inflation will inevitably eat away at some of your wealth, especially with interest rates at such low levels. Year-on-year the inflation rate edges up, typically between 2 per cent and 3 per cent, which means the value of your cash held in low-rate savings account is probably declining in real terms.
This is just one area where financial advice is so important. Engaging a financial adviser enables you to develop a better understanding of the impact of asset allocation and the importance of diversification strategies for long-term portfolio performance. Retaining too much in cash can endanger wealth creation over time. An adviser can help to create a strategy that balances returns while holding an optimum level of cash for unforeseen circumstances and economic cushioning.
Gaining exposure to growth assets and different asset classes for a key investment strategy is another area where SMSF trustees may benefit from advice. As it stands, SMSFs held almost one-third of their collective wealth in Australian shareholdings.
In particular, SMSF shareholdings of Australian shares alone hit $187.8 billion in the June quarter. This was up 4.3 per cent from $180 billion in the March quarter, according to ATO data, and local shares made up around 30 per cent of all SMSF assets. Here just $3.3 billion was invested directly in offshore equities, or less than 1 per cent of total SMSF assets, according to the ATO.
SMSFs have a great opportunity to explore offshore asset markets via the huge number of international managed funds or exchange-traded funds available, where there can be opportunities to diversify their portfolios across different asset classes and countries. In this situation financial advisers can potentially add a high level of value through exploring different international investment options and detailing expected risks and returns so SMSF trustees can make informed investment choices.
At the same time, SMSF Australian property holdings continue to grow as volatile share markets increase the appeal of bricks and mortar, which to some trustees can look increasingly stable. Investments by SMSFs in residential property totalled a record $24.4 billion as at 30 June 2016, up from $24 billion in the March quarter, according to the ATO data. Commercial property investments also jumped to $68.6 billion, up from $67.4 billion in the previous quarter.
Given the higher yields on residential property (usually 3 per cent to 5 per cent) and commercial property (ranging from 7 per cent to 8 per cent), property is drawing increased numbers of SMSF investors. Moreover, over the long term, growth in the capital value of property can boost your wealth, with long-term returns rivalling those gained on shares.
As the Australian population ages, and even more people begin to establish their own SMSF and chase better returns, we can expect even more money to flow into property given the reliable income streams and returns it can deliver over the long term.
While cash serves a key purpose in an SMSF, it’s important to strike the right balance of defensive and growth assets, depending on your situation and stage in life. Maintaining an SMSF balance that is skewed in the direction of excess cash may have a dramatic impact on creating an effective retirement savings strategy over the long term. Consider speaking to a financial adviser before you make any investment decisions for your SMSF. They can work with you to develop an investment mix for your circumstances and retirement goals so you can maximise the benefits of using an SMSF.
By Jason Dunn
12 Oct 2016