Moving to mid-caps will rebalance your portfolio

The following interview appeared in The Australian on January 31, 2016.
By · 31 Jan 2017
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31 Jan 2017
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New Year’s resolutions are often made with the best intentions, only to be forgotten within days or weeks.

But do yourself a favour. If you resolved to review your investment portfolio, and to take steps to rebalance it in the new year, make sure you actually do that review, and do it sooner rather than later. If you didn’t make that pledge, add it to your priority task list.

Recent research from CommSec shows SMSF trustees are fixated on Australia’s top 20 largest stocks when it comes to the share market.

While holding larger listed stocks is prudent, they have not necessarily provided the best returns over time.

Investors with wider diversification into companies outside the top 20, and even outside the top 200, have in many cases done better. Part of that reflects concentration risk, with banks dominating the top 20 ASX list.

CommSec analysis shows SMSFs were the largest net investors in the ASX top 20 during 2016, with the four biggest banks making up more than 32 per cent of SMSF holdings. That’s despite increasing concerns among analysts over the earnings sustainability of the big banks, with ratings agency Fitch also revising its outlook on the sector to negative earlier this month.

According to CommSec, banks comprise nearly a quarter of all trades by value for the SMSFs.

Separate SMSF investment data from the ATO shows Australian shares were the biggest beneficiaries of investment funds in the September quarter, with the total value of self-directed super dollars invested in stocks rising by $8.8 billion in the three months to $192.4bn.

That figure is almost matched by the huge amount of SMSF funds ($157.4bn) invested into cash — which is equal to about one-quarter of total SMSF investor assets — an alarming statistic given the dismal returns from banks accounts at current interest rate levels.

Investors would be much better served, returns wise, by redirecting more cash into assets such as shares that generate higher growth and income.

That’s where picking stocks with the best prospects is crucial.

After the big banks, research shows that investors prize the big resources stocks BHP Billiton and Rio Tinto in their portfolios (11 per cent), with materials and energy nearly another quarter of trades by value for SMSFs.

Other key holdings include telcos such as Telstra (7.8 per cent), diversified financials such as Macquarie and big insurers QBE (6.4 per cent) and Wesfarmers and Woolworths (6 per cent).

Yet, pleasingly, the CommSec research shows SMSF trustees are also moving towards the mid to small-cap market.

Marcus Evans, head of SMSF customers for Commonwealth Bank, said that while SMSFs were the net buyers of the banks and resource stocks over the past 12 months, CHESS holdings of stocks outside the ASX 100 have increased by 3 per cent.

The use of exchange-traded products, such as exchange traded funds (ETFs), listed investment companies (LICs) and exchange-traded managed funds, to diversify into international equities has remained constant at about 2 per cent of total CHESS holdings. SMSFs make up about a quarter of all ETF trades, although ETF activity was down marginally on 2015.

“One pattern emerging is the move from ETFs to direct shares when the market spikes down and specific shares become attractive from a valuation perspective,” Evans said.

There’s no time like the present to check your portfolio and it’s a relatively quick process.

There are free portfolio manager tools available online where you can easily enter all your asset details and view your current asset allocation ratio.

For investors with a lower-than-recommended allocation exposure score, the most prudent course of action is to rebalance one’s asset allocation to improve diversification, reduce risk and improve returns.

The key to successful portfolio management is having, and sticking to, defined investment objectives. Emotion should never come into play, but when circumstances dictate active investors should be ready, and prepared, to respond.

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Tony Kaye
Tony Kaye
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