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Could the ‘SMSF trade’ be coming to an end?

Owning these shares has not only been an inexpensive strategy for self directed investors, it has also been lucrative.



The “SMSF basket” has been the best trade in town for a number of years but a flattening out of returns within this popular collection of shares could be a sign of things to come.

The big banks, along with a handful of top 20 market capitalised companies, including historically reliable income producing stocks and some perennial “market darlings” make up the basket of 10 shares popularly held by self-managed superannuation funds. 

SMSFs hold around 14 per cent of their overall assets in these 10 stocks at any given time, according to a recent survey by AMP-owned SMSF administration provider, SuperConcepts. This is based on a quarterly survey of a representative group of 3,000 SMSFs representing assets of around $3.1 billion.

Extrapolating the SuperConcepts research to the broader $600 billion-plus segment, the SMSF allocation to this basket of 10 shares could represent in the vicinity of $84 billion.

Smart Trade 


Owning these shares has not only been an inexpensive strategy for self directed investors, it has also been lucrative.

Holders of the SMSF basket would have more than doubled their original investment since the start of 2011 compared to the S&P/ASX200 index return of 65 per cent during the same period, an outperformance of 35 per cent, performance numbers based on an equal weighting of the basket shows.

For the 12 months to mid-September the SMSF basket returned 32 per cent, a more modest outperformance of the benchmark which returned 21 per cent during the period.  


“It’s been a smart trade however you look at it, particularly between 2012 to 2015,” says Dermot Ryan, AMP Capital Portfolio Manager – Direct Equities.

Since the start of 2012 the big four banks have been amongst the share market’s strongest and most consistent performers; falling rates have worked in the banks’ favours while the domestic property lending market has been booming and their reliably strong dividends have remained in high demand. 

Other large companies commonly relied on by investors for paying out dividends have performed well over this period too.

But the future for this group of stocks looks less rosy than the trajectory in previous years, Ryan notes.

“There is mounting evidence things are about to start getting tougher for some of these names,” he says.

With lending slowing and banks moving to reprice loans, it’s expected margins for banks will be tighter, Ryan explains.

Meanwhile, Australia’s big banks are among the most highly valued in the world at a time when trading conditions are expected to become more challenging, he points out.

Performance of the SMSF Basket has flattened in recent months and Dermot says he expects headwinds to start dragging on the Basket’s performance.

Dividend sustainability

 
“I think the recent earnings season was a bit of a line in the sand for some of the commonly held stocks which might have traditionally been reliable income earners but now have a question mark over their dividend sustainability,” Ryan says.   

For nine years Telstra held onto a 28 cents per share dividend despite twice generating earnings below this amount and the company’s decision to cut the dividend by 30 per cent caught the market by surprise.

While domestic housing conditions remain strong, building activity looks to have peaked in the short term and weakness in the consumer spending underpinned by high household debt will make conditions tougher for this group going forward, Ryan says.

The composition of the SMSF basket has remained quite static over the years, according to Philip La Greca, SuperConcept’s Executive Manager, SMSF Technical & Strategic Solutions.

“The SMSF investors are likely to buy shares they know, usually household companies among the larger names,” he says.

Given that one-third of all SMSFs pay pensions – funded in part by dividend payments – it’s no surprise funds stick to well known dividend paying names, La Greca highlights.

“They do get a bit attached to some stocks, no question,” La Greca says.
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