Superannuation and the art of investing

Investing is often described as part science and part art.

However, in some superannuation portfolios, the art is less about creative ways to think about investment markets and more about the physical expression of an artist's work.

Art - or more correctly the broader category of collectables - is a rather contentious and emotive area of debate in superannuation investment circles.

The broad review of our superannuation system chaired by former Australian Securities and Investments Commission deputy Chairman Jeremy Cooper last year went so far as recommending that self-managed super funds (SMSFs) be banned from including collectables in their investment portfolios.

That was not because the Cooper Review found evidence of significant abuse; rather, the argument against collectables was more on a suitability basis for a superannuation fund with the sole purpose of building retirement savings and an income stream for the retirement years.

Collectable type investments more properly belonged outside the SMSF environment, the Cooper panel argued.

As it transpired, this was one of the Cooper Review recommendations that the Federal Government did not accept, instead opting to tighten up the regulations to ensure people with their own SMSFs cannot enjoy present day benefits from their investment portfolio that are denied to members of public offer superannuation funds.

The challenge of defining those new rules is still a work in progress, as the Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, acknowledged this week.

Somewhat fittingly, he was giving a speech in the Art Gallery of Western Australia on superannuation. While acknowledging that the lack of clarity about the new rules has created uncertainty, he said SMSFs now have $623 million invested in art and collectables - up 7 per cent from June 2010 to June 2011.

Any discussion about the merits or otherwise of investing in art (or other collectables, for that matter) tends to elicit an emotional response, and it is perhaps interesting to think about the difference between buying a painting versus contributing 9 per cent of your salary into your superannuation fund.

Take this quick quiz: if you are going to invest a portion of your SMSF portfolio in artworks, would you rather buy when market prices are lower or higher?

The second leg of this quiz (inspired by an essay written by US investor Warren Buffett) asks: would you rather buy shares for your superannuation fund when prices are lower or higher?

Buffett uses the example of hamburgers - if you enjoy hamburgers and you are not a beef producer and plan to eat hamburgers throughout your life, would you rather prices be higher or lower?

The answer on the hamburger or art question is self-evident, but according to Buffett, most investors flunk the shares question. That underscores a behavioural trait that can afflict us as investors. We prefer - and industry cashflow figures tell a compelling story here - to put more money into shares when prices are high rather than when they are heavily discounted.

Letting sentiment - be it overconfidence or fear - drive investing behaviour can cost investors dearly.

That is a picture the superannuation industry needs to help redraw.

Robin Bowerman is the head of corporate affairs and market development at Vanguard Investments.