SMSF data doesn't spell death

Summary: SMSF growth rolls on unabated, despite some predictions. But how do your investment holdings stack up with your peers?

Key take-out: At the end of 2017 there were almost 600,000 SMSFs holding $720 billion worth of assets. 

It's always interesting to read the predictions that self-interested parties have about the demise of self-managed super funds (SMSFs). It's been happening for years. More than a decade, maybe two or three. This week, it was the turn of VicSuper's chief executive, Michael Dundon.

Dundon said his super fund had seen a 12 per cent increase in the last 12 months of people over 55-years-old winding up their super funds to put money into his fund. For his new customers, SMSFs were too complex to manage and the headache of running pensions too big, he said. He believes this is part of a new, increasing trend.

I doubt it. One swallow doesn't make a spring. One anecdote doesn’t make a trend. One super company's fortune in winning a greater portion of the small number walking away from SMSFs doesn't spell their death.

Side note: VicSuper's customer pickup could come down to something as simple a recent run of good performance attracting attention. I don't know.

The Australian Taxation Office's figures show no significant change to the pace of growth of those signing up for SMSFs. And no great uptick in those closing funds. According to the ATO, the were more than 592,600 SMSFs at the end of 2017, with a total of nearly 1,119,000 members. The number of super funds for the 2017 calendar year was estimated to have grown by more than 12,000. The only unusual spike in ‘closures’ was in the September 2017 quarter and was enforced by the ATO itself, when it cancelled the ABNs of nearly 9000 SMSFs.

It's important to note that the ATO's figures are often a year or so behind, as SMSFs report data for the previous year, through their tax return. But in the most recent figures, the net establishment of SMSFs for the 12 months to June 2017 is sitting at 21,818. For the previous three years, it was between 21,500 and 22,000.

SMSFs and cash exposure

But have you noticed any change in your own investment philosophy, and what your super fund is invested in?

The ATO's statistics are the broadest in the industry, but are still based, to a degree, on estimates. They show the movements in the investment holdings of SMSFs over time - which tend to show movement is generally glacial. While individuals can move quite quickly, we, as a group, tend not to.

Total assets in SMSFs topped $720 billion in the December quarter last year, up more than $50 billion, or 7.5 per cent, from December 2016. Over that 12 months, super funds continued to reduce their relative exposure to cash as an investment, in favour of other asset classes. Cash holdings rose over the period from $154.5 billion to $157.3 billion, but they fell as a percentage of total assets since they didn't keep pace with the broader asset increases. In December 2016, funds held 23.04 per cent of their assets in cash, falling to 21.81 per cent a year later.

Of all the trends across a longer period, the reduction in holdings of cash assets is the most significant. In December 2013, five years after the GFC, SMSFs were still holding around 28.07 per cent in cash. Over the four years, that effectively means SMSFs have reduced their cash holdings by 22.3 per cent. In the most recent 12 months, the decrease in cash has been met with an increase in share holdings, which is up from 29.31 per cent of total holdings, to 30.3 per cent.

SMSFs now hold $218.5 billion of listed shares, up from $196.6 billion a year ago.

Property as an asset class

Property as an asset class continues to gain favour and is benefitting from the strong increase in housing prices, particularly in Sydney and Melbourne. Commercial and residential properties, as asset classes, increased marginally over the year, but not significantly.  However, the trend over four years, shows a move away from commercial property, which fell from 11.97 per cent to 11.1 per cent, to a total of $80.1 billion of assets.

LRBAs, property and trusts

SMSFs have increased their holdings in residential property, from 3.65 per cent to 4.75 per cent – a 30 per cent increase in total holdings. Over this period, the dollar value of assets has lifted from $18.8 billion to $34.2 billion. But these property assets do not include assets held in limited recourse borrowing arrangements (LRBAs). While LRBAs can be held over any asset technically, they are almost solely held over property.

From 2013 to the end of last year, LRBAs grew from 1.87 per cent of assets ($9.6 billion) to 4.36 per cent of assets ($31.4 billion). This is partly due to the ATO reclassifying how it measures LRBAs in recent years.

With regard to LRBAs, they are most commonly used by smaller, more aspirational SMSFs. Their highest use is between $200 thousand and $500 thousand, where approximately 8.4 per cent of all SMSFs have an LRBA in place. This falls away slightly to 7.37 per cent between $500k and $1 million. It then falls dramatically for funds between $1 million and $10 million, but is then used more heavily by funds with $10 million or more, with 4.94 per cent of those funds using LRBAs.

Listed and unlisted trusts have also been on the receiving end of inflows. Listed trusts have increased from 3.6 per cent of total assets to 4.68 per cent and unlisted from 9.17 per cent to 10.79 per cent over the four–years.

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.