Paul's Insights: Selfies favour shares

It's official - Australia's army of self-managed super funds (SMSFs) makes up one of the biggest like-minded group of investors on the Australian sharemarket.

Collectively, SMSFs – or ‘selfies’ – own around 20% of the local sharemarket. As a combined group, that makes them very powerful indeed.

But mum and dad funds aren’t in shares for the power.

It’s no secret that Aussie shares offer two key benefits that make them well-suited to super funds – regular dividend income, and the potential for long term capital growth, both of which can be lightly taxed.

Oddly though, many selfies are cooling on direct shares.

A recent report by Investment Trends found SMSFs currently have around 35% of their portfolio in direct shares, down from almost 50% five years ago.

It’s not a sign that selfies are bailing out of shares altogether. Many are moving their money out of directly held shares, and into exchange traded funds (ETFs) and other diversified products.

That’s not always a bad thing.

I’ve come across research showing do-it-yourself funds often concentrate their sharemarket investments in just two main sectors – finance and resource stocks. This can leave your retirement savings highly exposed to possible shifts in these industries.

The added appeal of ETFs is that the fees are extremely low, so they can be a very cost-effective way to diversify your SMSF investments.

The Achilles heel of SMSFs is that many focus their investments on Australia.

One-third of the SMSFs don’t have any overseas investments at all, though many trustees say they’d like to invest internationally. The big hurdle among selfies is lack of understanding about what to invest in, or how to invest, overseas.

There are a variety of ways to invest globally. This can include ETFs, ASX listed shares with overseas revenue and actively managed funds.

Something worth noting is that whatever you can invest in here in Australia – be it property, shares, or fixed income, you can also invest in internationally. The trick is to minimise the costs.

So, how do the returns compare? Well, bearing in mind that overseas shares don’t have the same tax-friendly benefits such as franking credits that apply to home-grown shares, the returns on international shares stack up well.

Over the last three years overseas shares have dished up returns of 15.71% compared to total returns (including dividends) of 12.57% for Aussie shares. If we stretch that to 5- and 10-year periods, global shares have notched up gains of 13.09% and 12.63% per annum respectively, compared to 8.47% and 8.34% for Australian shares.

It makes offshore investing worth a look for your selfie. By keeping a close eye on fees, it can help you tick all the boxes for healthy returns plus diversification – and that’s always a plus for SMSFs.

 

Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

 


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