Cashed out

Cash crazy DIY funds may have missed the early stages of the ASX rally.

PORTFOLIO POINT: Some SMSF trustees missed the equity and property boats in the September quarter. Why did you hold back?

It’s no secret that the last financial year was a disappointment for investors. The 10%-ish mini-crash in Australian equities in May and June ruined what would have otherwise been a reasonable year.

Come July 1, markets started rallying. Between July 1 and September 30, the Australian market rallied 300 points. And the rally continued well into October, though markets have weakened a little since then.

But new statistics show that SMSFs missed the rally. New money was not going into shares and property. It was pushed toward cash and fixed interest – safer, though lower return, investments.

In fact, it’s arguable from the figures, that a sell-down out of shares continued as markets were rising.

It meant that you missed returns of around 8-9% from Australian shares, more than 5% from international shares, and around 6-7% from Australian property and 3-4% from international property.

And I want to know why.

Was it inertia? Was it fear of another false rally? Fatigue? A sense that lower-risk assets will provide what you’re after, without having to bet on the volatility of equities? Just sitting on the sidelines for now?

Of course, these are averages. Many of you will have made a monty during the quarter. But many others were obviously holding the average down. Shoot me an email ( and tell me why.

Research from Multiport, which does the administration for around 1,900 funds, certainly shows that asset allocations for SMSFs did not benefit from the share and property boats rising during the quarter. It was either directed deliberately to “income” assets of cash and fixed interest, or sat on the sidelines in cash.

In essence, new money continued to pour into defensive assets, but wasn’t finding its way into shares and property.

The evidence comes from Multiport’s figures, which showed very little change across asset classes for September. Cash fell from 26.8% to 26.6%, and fixed interest increased from 10.5% to 10.6%.

Similarly, Australian shares increased from only 35.8% of holdings to 35.9%. International shares increased by 0.1% to 7.7%, and property investments fell by 0.2% to 18.1%.

Based solely on the increase in shares and property asset values alone – ignoring any new money coming in or going out – allocations to shares and property should have increased with the rising tide. With Australian shares, for example, and assuming a 9% lift for the quarter, the increase should have been around 1-2%, rather than the tiny fraction of 1% that was recorded.

The same applies, to a slightly lesser extent, to international shares and listed property.

Overall, “balanced” portfolios, where around 60% of funds are in shares and property, should have achieved a return of nearly 5% for the quarter. SMSF returns, on average, would have been well below that figure, based on Multiport’s data mining.

Multiport’s figures also show some other interesting facts about where SMSFs are heading.

Most interesting outside of the allocation figures is the use of the Limited Recourse Borrowing Arrangements (LRBAs) – the rules that allow super funds to borrow to purchase assets.

The term LRBAs (which I guess is no less unwieldy than the SMSF acronym) came about as a result of the Australian Tax Office rewriting the rules surrounding borrowing in super funds in 2010 (see my column Property gets a bigger tick in SMSF changes).

And it shows that DIY super is keen and ploughing ahead with borrowing inside their super funds to purchase assets.

Multiport says that around 14.5% of SMSFs are now using LRBAs for the purpose of investing in super. It’s unclear as to whether those figures include the old SMSF favourite of instalment warrants.

In volume of loans alone, that is split 57% for equities (which might include instalment warrants) and 43% for property.

Multiport said that 24% of the total number of direct property investments now had a gearing arrangement in place. Multiport said “only” 24%.

But given that it wasn’t possible to gear into direct property until the rules were changed in September 2007, and that there was little in the way of suitable loans from major financial institutions until the last two to three years, this shows that SMSFs have a strong appetite for geared property investment inside their SMSFs. From the likely starting point of 0% in 2007 to 24% in just a few years is a substantial uptake.

Also, the new LRBA rules announced in 2010 make it expensive to gear into equities. If you want to gear into equities, you need to start a new bare trust for each individual shareholding, or “single acquirable asset”. That is, if you want to hold geared portfolios of 10 stocks, you need 10 individual bare trusts.

The average SMSF property loan is sitting at $274,000, up marginally from $272,000 in the previous quarter.

Quarterly movements are one thing, and, as always, arguably just “noise”.

Over the course of the year to September 30, cash and term deposits continued to find favour, despite interest rates falling considerably over that period.

While for the quarter, the change was minimal, the allocation to cash has seen a significant rise over the year, from 24.7% to 26.6%. Fixed interest, over the same one-year period, fell from 14.1% to 10.6%.

Fixed interest has been the best-performing base asset class over the last three and five years (if you take base asset classes as being cash, fixed interest, property and shares).

Shares remained almost stable, falling 0.1 percentage points to 35.9%, while international holdings fell 0.2 percentage points to 7.7%. Property increased from 17.6% to 18.1% of total holdings.

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:

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  • The Australian Securities and Investments Commission (ASIC) is reportedly looking into property spruikers encouraging investors to set up self-managed super funds. The Australian newspaper reported an ASIC taskforce was looking into aggressive marketing of property developments, and conducting “limited surveillance” on advisers and accountants who may be helping to set up SMSFs for the sole purpose of investing in property. While not illegal, ASIC suggests it fails in diversity and may breach liquidity requirements. Commissioner Peter Kell was quoted: “We don't want SMSFs to be the preferred vehicle for dodgy property spruikers.”
  • In related news, ASIC has also released a consultation paper on proposed SMSF auditor competency standards. Legislation passed this year requires auditors to meet competency standards, which for most involves an exam or meeting hurdle requirements, in order to be registered. The proposed standards are based on the 2008 Joint Accounting Bodies (JAB) standards, with comments due by November 30. ASIC commissioner Greg Tanzer says: “SMSF auditors play a vital role as gatekeepers… [and] these standards are important in protecting every day Australians' retirement incomes.”
  • A man who accessed his SMSF to build his partner a yoga studio has failed to convince the Administrative Appeals Tribunal (AAT) to exercise discretion regarding tax on further monies withdrawn from the fund. Trevor Peach was unsuccessful in an appeal against the Taxation Commissioner after withdrawing money over the 2008-10 financial years for his personal use. The tribunal found Peach continued to undertake paying work despite signing a letter declaring he had retired, and did not meet compassionate or financial hardship grounds for release, so must have the money taken from the fund count toward his assessable income.
  • DIY investors have reduced fixed interest holdings by almost a quarter in the year to September 2012, according to the latest Multiport SMSF Investment Patterns survey. Media reports suggest interest rate cuts over the past year have seen fixed interest holdings reduce to just 11%, while asset allocation to Australian equities (32%) remained roughly flat. Meanwhile, Multiport was named SMSF administrator of the year at Rainmaker’s SelectingSuper Awards held in Melbourne, for the “best and broadest range of services and support in SMSF administration to trustees, financial advisers and accountants”.

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