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The SMSF domestic bias: is it time to accelerate global exposure?

According to the Association of Superannuation Funds of Australia (ASFA), to achieve a comfortable retirement a 65-year-old SMSF member needs $824,000 in assets.



Self-managed super fund (SMSF) investors typically have a bias to Aussie equities. But this bias could depress returns over time given the local share market has exhibited flat returns this year against stellar performances from overseas markets.

In light of this, and considering research that shows SMSF members will need to bump up their funds to achieve a comfortable retirement, is now the time to reconsider an allocation to global assets?

According to the Australian Taxation Office’s (ATO’s) latest figures, the total amount invested in overseas shares in SMSFs is $4.06 billion, up from $3.37 billion in March 2016.

In contrast, SMSFs hold $207.62 billion in listed domestic shares (up from $172.30 billion in 2016) and $157.02 billion in cash (up from $153.27 billion in 2016).

The SMSF Association’s new paper, Retirement Insights: SMSFs Treading Water, analysed Accurium’s database of more than 65,000 SMSFs and around 130,000 trustees across the 2016 financial year.

The report indicated that as a result of a persistent environment of low share market returns, SMSFs will need to add to their fund to ensure they have enough money when they retire.

According to the Association of Superannuation Funds of Australia (ASFA), to achieve a comfortable retirement a 65-year-old SMSF member needs $824,000 in assets.

According to the SMSFA’s report, median SMSF balances grew by 1.2% for the previous financial year, based on a median investment return of just 1.0%.

It’s findings that show more than 50% of all SMSF retirees can’t be reasonably confident of achieving their desired retirement lifestyle in retirement. One in four are unlikely to achieve their investment goals.
Peter Hogan is the Self-Managed Super Fund Association’s Head of Technical.

Hogan says it’s concerning that investors are not responding to lower returns from local equities.

“They seem to be living with reduced returns. It appears SMSF trustees are simply happy to live off the income they generate from their fund and they're not too concerned about the value of their capital going up and down, which is reflected in the returns they receive,” says Hogan.

He suggests SMSF investors are happy to take a longer-term view and they are so far not concerned by the poor returns more traditional asset classes are delivering.

“They may not see short-term market performance as a long-term glitch in their overall investment objectives.”

Hogan believes SMSF asset allocation is often driven by investments they understand and to which they are comfortable allocating funds, rather than by returns.

“They could get access to overseas markets by investing in ETFs that provide exposure to international share indices. But this has not been a huge growth area,” he notes.

He suspects many SMSF investors are happy to take a long term view and avoid putting their capital at risk.

“They are saying, ‘I've got a 25-year investment horizon, and as long as the dividends I'm getting are reasonable and I'm still getting a refund on my franking credits, I can fund my lifestyle. So that I'm not too concerned about how the share market bounces around.”

For some SMSF investors with substantial assets this approach might be sensible. But other investors with more limited means may need to take on more risk in the current environment to achieve their desired returns.

As ever, the idea is to set achievable investment goals for the fund and continually monitor how its assets are helping to achieve these goals.

If the trustees find the assets are not going to help members achieve their retirement income goals, a re-think of the fund’s asset allocations may be warranted.
Funds related to this article: Dynamic Markets Fund

Navigating the ups and downs of the market cycle. This fund uses dynamic asset allocation to actively adjust the split of investments across asset classes to achieve diversification in response to market changes.

The Fund aims to achieve growth above inflation1 and smooth out the economic cycle over a rolling 5 year basis.

1Consumer Price Index (CPI) - the Reserve Bank of Australia inflation rate, trimmed mean

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