A million reasons to watch SMSFs

The number of Australians involved in SMSFs has surged past the million mark ... now everyone wants to know what they're doing.

Summary: Individuals who are part of the SMSF revolution now number more than one million – and their influence over investments is rising. Within property, recent figures by the ATO have revised the level of limited recourse borrowing arrangements held by SMSFs to $8.3 billion from $2.6 billion. Meanwhile, SMSF holdings in listed Australian shares have increased by 18.5% to $177.6 billion over the past year.

Key take-out: SMSFs now control 16% of the entire Australian equities market and are tipped to pour more money into shares, so tailoring your investment strategy to predict what they will do next will have obvious advantages. But predicting what they will do next is hazardous.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Underdog status is something with which DIY super funds have long been comfortable. Being underestimated has never worried them.

Authorities and outsiders often misread them, misunderstand what drives them and misjudge how they’re going to react.

Perhaps they should stop trying. There are now more than one million individuals who are part of the SMSF revolution. Trying to shoe-horn them into boxes is pointless – they are not controlled by any particular unifying force, even if they do share some characteristics.

The latest Australian Tax Office (ATO) statistics on SMSFs goes a long way to point this out. The number of individual members in SMSFs stood at 1,011,686 as at June 30 this year, tipping seven figures for the first time.

But the most surprising thing in the statistics was actually a revised calculation by the ATO itself. The ATO, which regulates SMSFs, has changed one of its major figures on SMSFs.

Buried in the quarterly statistics was a massive revision of the level of limited recourse borrowing arrangements (LRBAs) held by SMSFs. LRBAs are the agreements by which SMSFs can get into (largely) geared property investments.

A growing influence

In June 2013, the ATO listed LRBAs as being at $2.6 billion. That figure has now been revised upwards to $8.3 billion, more than tripling the ATO’s previous estimate. The ATO states that this was the result of better data collection, though there had been significant growth in LRBAs in the 2013 financial year.

Correspondingly, while the calculation of LRBAs rose by $5.6 billion, the quantum of assets in “real” property was downwardly revised by $6 billion. It will make the statistics more accurate going forward, the ATO says. (I’ll come back to the ATO statistics shortly.)

And it’s also interesting to look back on another historical prediction that was horribly and wildly wrong. In my article The “Peak SMSF” Theory, I wrote about a report by Rice Warner Actuaries, which predicted that investor interest in SMSFs had topped out. RWA claimed that by 2014, the share of the superannuation market enjoyed by SMSFs would have fallen.

It hasn’t. It’s risen. More and more Australians want control of their retirement assets, control of their tax and control of their estate planning – important areas of anyone’s investment universe, that trustees understand are delivered better by SMSFs.

SMSFs now control an incredible portion of Australia’s investment market.

Following the SMSF bandwagon

Credit Suisse, in equity research dissecting the ATO’s figures, says that SMSFs now control 16% of the entire Australian equities market. They want to try to second guess what “selfies” are going to do next. If they can predict that correctly, and can get into those stocks before SMSFs converge, there are obvious advantages for trend followers.

This is based on the ATO’s figures showing that of the $557 billion of assets controlled by SMSFs, $177.6 billion are in listed Australian shares, with a further $157.9 billion sitting in cash. Share balances have grown 18.5% over the last year, while cash holdings have grown just 5.1%.

Credit Suisse predicts that SMSFs are going to be the biggest buyer of Australian equities, tipping something like $24 billion of new money into the market in the coming year.

It’s no surprise that they think you’re going to continue to snap up the biggest of the big dividend payers – the big four banks and Telstra – because they’re ongoing favourites.

The next candidates

But Credit Suisse’s analyst Hasan Tevfik believes he knows what you’ll be into next. And that includes Myer, Tabcorp and Macquarie Group, which have high dividend yields also. He then also includes Caltex and iiNet.

“There is good reason to believe they will remain influential in the Aussie equity market. Rising superannuation concessional caps, low cash rates, bigger dividends and more pension harvesting Selfies should all ensure solid Ausie equity demand will continue,” Mr Tevfik wrote.

“Selfies are not going away. Other investors need to consider investment strategies sympathetic to these massive flows.”

A further interesting statistic in the ATO’s data shows a dive in contributions. Contributions from employers sat at $10.1 billion in 2008-09, but trended downwards in the following years to hit a low of $5.5 billion in 2012-13. This trend follows the slashing of contributions limits over that period, during which time limits fell from $100,000 to $25,000.

This partly reflects the fact that a higher proportion of SMSF trustees are self-employed.

But SMSFs just keep motoring along, looking after their own best interests. Predicting what they’ll do next is hazardous.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

Graph for A million reasons to watch SMSFs

  • The asset allocation of SMSFs at the end of the June quarter reveal high concentration risks, leaving retirees vulnerable to a share market downturn, according to Paul Resnik, co-founder of risk profiling company FinaMetrica. “By being so heavily exposed to Austrlaian asset classes, SMSFs leave themselves vulnerable to our local market collapse when that happens – and it will,” said Resnik.
  • SMSF trustees must be careful about hybrids with shaky underlying structures, such as those with ‘pay-in-kind toggle notes’, according to Aberdeen Asset Management. SMSFs are particularly vulnerable because while they have been given greater access to a wide variety of investments, they don’t necessarily have the education or skill.
  • The number of SMSF closures in 2013-14 dropped by 75% to 2,349, according to the ATO’s June quarterly report. However, the data is preliminary and only includes closures as a result of compliance and cleansing activity and those initiated by trustees.

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