All eggs in one basket – SMSF Feature Part 3

SMSF clients may be more sophisticated and savvy with their investments but volatility affects them as much as anyone else. How do they invest their money? Malavika Santhebennur writes.

Despite SMSF clients being more sophisticated with typically large balances, they are as vulnerable to being affected by short-term market volatility as other super members, according to Vanguard head of market strategy and communications, Robin Bowerman.

SMSFs had a very bearish outlook in 2017 as they were apprehensive about the impact of a Chinese slowdown on the Australian economy, perceived high global debt levels and share market volatility.

"Like all investors people do react to market volatility and particularly bad news. And that's one of the things where we see advisers add tremendous value when they can basically hold a client's hand, stop panicking, get them to stay on course for the long-term," Bowerman said.

"And that's a really hard thing for an adviser to quantify in terms of the sort of value they've added."

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Short-term volatility should not affect SMSF investors who generally viewed investment in 20, 30 or 40-year time horizons.

According to the ‘Vanguard/Investment Trends 2016 Self-Managed Super Fund Reports', 60 per cent of SMSF investors said over half of their SMSF assets were invested in one investment type.

Thirty-eight per cent said over half of their SMSF assets were invested in direct shares outside of managed funds and exchange traded funds (ETFs), while 11 per cent said they invested in cash and cash products.

The ATO's SMSF statistical report for September 2016 showed SMSF investors had invested $157.4 billion in cash and term deposits, which was almost a quarter of the $611.5 billion of SMSF assets invested.

CommSec data released in January showed SMSFs were the largest net investors in the Australian Securities Exchange (ASX) Top 20 during 2016. Bank equities comprised more than 32 per cent of SMSF holdings, followed by materials at 11 per cent.

Banks comprised nearly a quarter of all trades by value for SMSFs compared to 18 per cent for non-SMSFs.

Exchange-traded funds

Investment Trends research from 2016 showed 99,500 SMSFs said they were intending to invest in ETFs within SMSFs, up from 76,000 in April 2015.

Bowerman believes ETFs enjoyed success among SMSFs as clients had considerable exposure to direct equities where they did not have exposure to managed funds. SMSF clients could trade through the same online broker that they used for other shares, buy one or two ETFs and enjoy broad market diversification at a low cost.

"They're powerful portfolio construction tools that let people buy one or two ETFs, it gives exposure to say, the whole US market, the whole Australian market, or the whole world market if you want it," he said.

"That works as a core satellite approach where you've already got your, let's say, typically about 14 to 15 shares in your SMSF portfolio, you hold on to those and you diversify and take away market risk by diversifying across the others."

Among SMSF clients who intended to make their first ETF investment, 34 per cent said better/more ETF research would prompt them to do so, while 33 per cent said they wanted more ETF educational materials.

The educational needs were fairly simply, including comparison between different products, performance, costs, risks, how ETFs work, and what the advantages and disadvantages were.

SMSF Association's head of technical, Peter Hogan, said, however, that it was common among SMSF trustees to demand more educational material and research on investments like listed shares, managed funds or ETFs.

"Their constant cry is they're always interested in research and they always like to understand what it is that they're putting their money into before they invest," Hogan said.

"So for you to be saying that there's research coming out saying they're asking for more information about ETFs, then once they're comfortable with it as a concept they might be willing to put some more money into them, I guess is a pretty common theme."

Click here to read part one of this feature: SMSF advisers – A convergence?
Click here to read part two of this feature: Superannuation reforms — the aftermath