'Cash is king' is dead

It’s time SMSFs woke up to the real cost of their love affair with the folding stuff.

Summary: Even though real returns on cash are nearly nil, SMSF trustees seem prepared to sacrifice usually better returns elsewhere for the security it provides. ATO figures show that total cash held by SMSFs has risen over the past three years, even as shares and property have performed better. But holding on to cash can be good if growth markets slam into reverse.

Key take-out: It’s highly likely that too many SMSFs are holding too much cash, but if you are holding reasonable amounts, make sure you are earning as high a return as you can find.

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

There’s always an exception to the rule. Sir Isaac Newton and his “what goes up must come down” law can occasionally be proved wrong.

For example, Australian self-managed super funds and their cash balances. They don’t go down, as a collective group. Ever, it appears.

It doesn’t seem to matter that cash has been beaten to death and is lying lifeless and bleeding on the floor. That getting returns above 3 per cent requires considerable and sustained effort, or possibly locking your cash away for periods. That for most bank accounts, even after tiny inflation at 1.3 per cent and tax rates of no more than 15 per cent, the real returns on cash are nearly nil.

SMSF trustees love cash. And, as a group, we seem prepared to sacrifice usually better returns for the security it provides. Cash comes into its own sometimes and can be the best performing asset, but it’s not too often.

We hoard the stuff. Given super tax, inflation and assuming a 3 per cent return, we’re happy with a real return of no more than 1.25 per cent at the moment.

Domestic shares did an average of 10.16 per cent for the year ending April (though we obviously had a turn for the worse in May) and 14.18 per cent compound for the three-year period.

And SMSFs do tend to have reasonable holdings of Australian shares. Cash and shares are our close to equally weighted barbells – big holdings of safe cash at one end and domestic shares at the other, with very little in between.

But it has been the asset classes in the middle (bonds, property and international shares) that have really performed over that three-year period, which suggests our cash/local equities preferences have cost us significantly during that time.

Table 1: Performance of asset classes (May 2012 to April 2015)

Asset class

1 Year % performance

3 years (compound) % performance

Australian bonds

8.91

6.15

International bonds

9.59

7.1

Australian property

25.97

20.03

International property

18.48

15.45

International shares (unhedged)

26.73

24.81

International shares (hedged)

17.15

19.34

But even the cantering markets experienced since May 2012 have not tempted SMSFs to redirect cash towards those assets. During that time, very steadily, the total cash held by SMSFs has increased from $121.8 billion to $157.4 billion, according to the Australian Tax Office’s quarterly review.

As a percentage, though, it has dropped. Over the same period, it has fallen from 34.9 per cent of total net SMSF assets to 27.1 per cent. And that is significant. (Part of it is explained by the appreciation in value from other asset classes.)

But for straight balance of cash held by SMSFs, there hasn’t been a backwards quarter in at least the last five years, as measured by the ATO.

It’s equally interesting that Australian shareholdings have dropped as a percentage of total assets during this period of roaring markets, from 35.8 per cent to 33.3 per cent.

That suggests that SMSFs are getting the diversification story, if somewhat slowly.

While we have been building and hoarding our cash supplies, APRA super funds have been doing the opposite and investing theirs, according to other data. Cash holdings in managed funds fell 1 per cent during the March quarter, which followed a similar fall in the December quarter.

On the face of it, these decisions by APRA funds to get out of cash and, presumably, head into other growth assets and probably into international assets, might mean they push ahead of SMSF returns.

SMSFs have a proud history of holding their own when it comes to investment returns. But they don’t always win. And when international markets are roaring harder than local markets, it is very difficult for them to beat APRA funds, which typically hold 20-40 per cent of their funds in offshore assets.

Investing in property

Outside of cash and Australian equities, SMSFs have few other serious investment interests.

One of these is Australian property, both residential and commercial. Over the same three-year period, residential property increased from $15.2 billion to $21.8 billion (roughly a 50 per cent increase) and commercial property from $43 billion to $72.1 billion, far outstripping growth elsewhere.

The relatively new area of limited recourse borrowing arrangements (LRBAs, or geared investments, predominantly property) jumped from $1.5 billion to $9.5 billion. Essentially, from nothing to a freckle.

In total, across international property and shares, investment increased from $3.6 billion to $6.3 billion. Far less than the increase in investment through LRBAs. Statistically, it’s one of the biggest gains. But coming off such a small base … it’s a shame, because that’s where the biggest gains were.

Looking for the best returns

The vast majority of us are comfortable with what we’re doing in our SMSFs.

And we know that holding on to cash at an effective rate of return of 1-2 per cent can be good if growth markets slam into reverse. (However, see the advantages of holding cash in an SMSF LRBA offset account that I outlined in this recent article: SMSF property investors: Rate cut winners, May 13.)

But it’s highly likely that too many of us are holding way more cash than we really should, given cash’s low returns in the last several years, and the wealth being created elsewhere.

If you are holding reasonable wads of cash, make sure you’re making it work to earn you something with as high a return on cash as you can find. If you’re earning less than about 2 per cent – such as most cash management accounts – then your cash is going backwards.

That’s not a recommendation to plough it all into bonds, shares or property. But, really, should we, on average, have nearly 30 per cent of our money sitting in cash?

There must be better options.


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 managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au. Bruce’s new book, Mortgages Made Easy, is available now.