Inside the minds of SMSF trustees

Welcome to the world of the 2014 self-managed fund investor.

A remarkable survey by the SMSF Professionals’ Association of Australia (SPAA) and Russell Investments tells us just what self-managed funds are thinking and doing in the current environment.

We learn a lot about where they seek advice, what their investment strategies are, and their plans for the future.

Seeking advice

When it comes to advice the self-managed fund trustees go first to their accountant, who helps them with tax and setting up the fund and probably knows more about the needs of the beneficiaries than any other person. Not only do just over half of the self-managed funds rank their accountants as first or second for advice, but the trend is rising.

One self-managed fund investor told the survey:

“I trust my accountant 100%. I leave the technical side of things to my accountant. He lets me know anything I need to know from the compliance side of things.”

Less than one-third of self-managed funds used a financial planner in
 2013. A strong view among self-managed funds is that they themselves can do a better job than a planner.

The survey shows that for the most part, self-managed fund trustees are nervous about financial planners, particularly when it comes to investment advice. In the past financial planners have too often plugged investment products where they were a secret beneficiary, or there was some other connection to the investment – i.e., they were not unbiased.

And, of course, as we all know they often had secret commissions. Much of that aspect of the financial planning industry has been removed, and most financial planners these days charge by the hour in the same way as accountants. But there are many who don’t, and the old suspicion remains that they have not fulfilled the potential they have. Similarly, self-managed funds overall are suspicious of managed funds because they have been linked to bad advice and high charges.

For the most part the issuers of managed funds see self-managed funds as their enemy, and are constantly lobbying Canberra to be tougher with SMSFs in a blatant exercise of self-interest. But SMSFs now have about one-third of the superannuation market overall, and about half of the market that is in pension mode.

Where SMSFs are investing

Cash

When it comes to investments, many people thought that SMSFs would substantially lift their share exposure given the rise in the market. As I have explained previously (see Are you a rank amateur investor?), bank deposits – particularly term deposits – have held up remarkably well as SMSFs have not exited the banking system. The SPAA survey confirms this, and with the benefit of hindsight the self-managed funds have too much money in term deposits and cash. The term deposit/ cash proportion fell from 33.9% to 31%.

Property

But the SMSFs still don’t trust shares, so instead of going to the sharemarket (which actually eased from 37.1 to 36.1%) the funds’ money is going into residential property. I am wary about this, not because bricks and mortar won’t be a good long-term investment. But right now the residential markets in Sydney and Melbourne are in two camps – those where the Chinese are major buyers and those where they are not. If you buy into a Chinese area, which includes most of the inner-city properties and some of the suburban areas, then you pay 10 to 20% more for your dwelling.

Chinese developers are starting to flood the market in Melbourne and also in Sydney, with small apartments in the inner-city. To the extent that SMSFs are joining the Chinese in inflating prices, I am nervous. If you are to invest in dwellings there should be two criteria – be wary of investing where the Chinese are operating, and also stay away from areas that are likely to be hit by the slump in the motor sector – unless you are buying dwellings at a very cheap price.

Shares

When it comes to share investment, SMSFs tend to be driven by income, so the vast majority of their investments are in the four big banks and Telstra. That also spills over into other leading stocks like BHP and Rio Tinto and Coca Cola etc.

In the main, SMSFs have spurned advisors in this area and have gone out on their own to select stocks. And, of course, to the extent that banks and Telstra dominate holdings, they have done very well. It does mean that companies have got to pay dividends to attract them, and that means there is less capital available for new growth developments. In particular, Telstra has a number of fantastic growth opportunities but I suspect that the demand for income from the self-managed funds that dominate its register will curb the ability of the company to pursue those growth areas.

The other interesting aspect of self-managed fund investment is that they have used Australian companies like the miners and blood products group CSL to be their proxy for overseas investment. Only about 5% of funds are in overseas investments. I’ve been advocating to Eureka readers that they buy listed international investment companies like Templeton, and as you know I do have a holding in Templeton.

But part of the reason why self-managed funds are so concentrated in certain stocks is that nobody amongst the corporate community ever addresses any messages to them. The presentations are all designed for institutions, so there is limited communication.

Retirement planning

And we see from the survey that a large portion of self-managed funds have as trustees people aged over 50, including a large percentage over 60. These people are becoming more and more orientated towards income as they use their superannuation for retirement.

Meanwhile, the survey shows that superannuation people are reluctant to invest in superannuation above the $35,000 cap for older people. As I have written before, I think the attraction of superannuation to those who can move into pension mode is so great that it is worth investing tax-paid money and taking up as much of your full entitlement as you can. For older people, this can be $185,000, of which only $35,000 is tax deductible.

Certainly, with my savings, that is what I try to do. It is true that a large portion of self-managed funds are risk averse. That also reflects the fact that a large proportion of them are moving into retirement and plan to use their superannuation to fund their retirement. Those in the industry funds and AMP-style funds are either younger or planning simply to cash out their superannuation to pay off the mortgage.

The pool superannuation funds have a relatively smaller portion of their funds with those using their superannuation for retirement.

But it does mean that superannuation funds are risk averse. I think too much of our superannuation money has been invested in too few a number of stocks. And, of course, at Eureka we have been opening up the possibility of investing in smaller stocks.

As we move into the next few years we face an avalanche of unemployment as a result of the motor sector closures, the curtailment of mining investment, and the swing away from selling in retail stores. This will curb banks’ abilities to pay higher dividends, which is why I suggested that investors not increase their banking holdings and begin to look for other opportunities.

And from what I see in the survey, that was good advice.