Different strokes for different folks

A speaker at a recent Financial Planning Association (FPA) lunch in Sydney asked which asset class was most representative of the average self-managed superannuation fund (SMSF) in Australia.

“Cash,” roared his audience of financial planners, as if relishing the opportunity to vent their frustration with the low-interest low-inflation investment environment of the past few years.

The reality is that many of the 300,000 SMSFs have achieved better returns since 2000 from dormant cash than from other more aggressive classes.

“Cash has been king”, says Super Concepts superannuation strategy manager Graeme Colley, achieving returns of between 4 and 5 per cent on average over the period.

And these returns, as well as the control SMSFs hand to investors, have boosted the vehicle’s popularity among baby boomers.

However, in many cases, Colley says, the SMSF returns are due to good luck, as SMSF trustees “often leave their funds in cash due to an ignorance of investment markets or just plain laziness”.

Furthermore, Colley suspects there’s a great deal of variation between the investment returns of individual SMSFs, which receive “little or no publicity” compared to those of the managed funds (see case study).

Despite their ‘flavour of the month’ status with baby boomers, ordinarily SMSFs are suited only to those people prepared to put the effort into maintaining them.

Establishing an SMSF with assets below $150,000 would probably not make an SMSF competitive with other super vehicles, Colley says.

“You see groups advertising them for people with less than $60,000 in assets, but I suspect that all you are doing is looking after their fee base rather than your own investments.”

Peppin Business and Financial Planners director Scott Mildren says a trend by boomers to manage their own retirement plan is also evident in a growing preparedness to use direct equity investments.

He says age doesn’t come into a client’s decision to use direct investment so much as an individual’s experience in owning shares and their tolerance of market volatility.

“The more assets a person has at retirement, and the more successful they’ve been during their career, the more likely they are to want more direct [assets] in their portfolio.”

On the other hand, he says there is not much demand from clients who’ve worked as an employee all their lives, and the only investments they’ve ever had is “five grand and a mortgage”.

By way of example, Mildren says clients with $250,000 generally tend to use managed funds, while those with $1 million probably would tend to use more direct investments than those with $600,000.

“Direct gives higher-value clients a consistency of income, and therefore greater surety of what their tax position is going to be, as well as a greater sense of ownership over what they’ve bought.”

Retirewell Financial Planning director Tony Gillett says there’s also an increasing tolerance for growth assets in the portfolio of baby boomers nearing retirement, and the greater risk that goes along with this strategy.

Many of Gillett’s clients in this demographic “realise they must include shares in the portfolio — it’s just a matter of how they have them and to what extent”.

He says there’s also a greater willingness to allow planners to invest in alternatives, such as hedge funds, managed commodity funds, infrastructure, and private equity.

The trend has encouraged Gillett to move away from the “institutional view that when a client retires you suddenly move them from a growth to a balanced portfolio or from a balanced to a conservative portfolio”.

Gillett says a well-constructed portfolio for boomers “continues to include proper diversification in the right proportion across the various asset classes”.

These clients are also increasingly resisting any style bias, particularly within the share portfolios, on the basis that equities are likely to be in a bear market for at least a decade, according to Gillett.

He says planners are having to chase alpha “a lot more actively than before the end of the bull market in 2000 to satisfy clients, moving up the risk curve a bit in selecting product, right across the spectrum”.

Gillett says these clients are also partial to planners using absolute return products in this era of single digit returns across all asset classes, as opposed to managing against a benchmark.

He says there are some clever strategies now available to skilled fund managers to boost returns in a low-interest, low-inflation environment, all of which involve clients accepting additional risk.

“You now get a long/short fund with a long bias, which allow skilled managers to go short,” he says.

“The money managers get back from selling those shorted stocks can be reinvested into their best long bets, instead of leaving it in cash.”

Asteron technical services head Louise Biti says clients are increasingly receptive to the idea that after spending 40 years making money for the purpose of retiring, it’s okay to spend some during retirement.

“They’re not purely focused on providing for the next generation by leaving something in their estate, which was the major priority of the previous generation of retirees.”

The first requirement of most retiring baby boomers, Biti says, is to generate income, and they don’t really care where the income comes from, be it aged pensions or investments.

There’s an increased interest by her clients in income streams, particularly the allocated products, in order to reduce their assessable assets and increase their social security entitlements.

Low interest rates are also driving enthusiasm for some of the hybrid fixed interest products, such as warrants and capital guaranteed products, she says.

Mariner technical services manager Kate Anderson says the recently launched term allocated pensions (TAPs) may also prove popular with baby boomers with excess benefits, because they allow them to access a higher pension reasonable benefit limit (RBL) than through the traditional complying annuities and pensions.

Anderson says previously planners attempting to overcome a client’s excess benefits could mainly look at allocated pension strategies.