SMSF money trail changes course

Trustees are slowly switching from cash … and some results are surprising.

Summary: SMSF trustees have gradually been moving their funds from cash into shares, but not just to the big banks and Telstra. There are some interesting surprises in the preferred stock pile.
Key take-out: The Australian sharemarket has been the biggest beneficiary from the SMSF cash switch, but international shares have also been popular. Interestingly, property exposure has fallen, while fixed interest has recorded a small gain.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

There are two assets that Australian SMSF trustees love more than any other – cash and Australian equities.

Often, self-managed super funds will hold 100% of their funds in these two assets alone. From a diversification perspective, it’s not healthy, but it’s certainly comfortable for those who choose this route.

Across the board, it tends to be more than 60% held in just these two asset classes.

But ongoing record low interest rates and a strong performance from equities over nearly two years have seen a rebalance of this love story.

SMSFs are (shock horror) departing from cash for greener fields. Largely, the search has been on for better yields and higher return potential.

But where they’re finding it is the real surprise. It’s not a straight swap out of cash into favourites, such as the banks and Telstra.

The most recent survey by the AMP-owned SMSF administrator Multiport shows a gradual shift out of cash over the last 12 months. The 2,000 funds administered by Multiport saw cash rates drop from 24.5% of all holdings down to 19.1%.

Depending on which way you want to look at it, that’s a monthly move of 0.45%, or a quarterly move of 1.35%.

Or, you could say that cash holdings fell 22% over the course of a year. Now we’re looking at a significant fall.

Where the cash trail leads

So, where is it going? And was it all a big withdrawal of cash? The answer to both of those questions is a little less clear. Because of the strength of the sharemarkets – domestic and international – a strong rise in equities will naturally increase relative holdings in those asset classes, while reducing percentage holdings in other asset classes.

Australian shares? Over the course of the year Australia’s stockmarket was strong, so there naturally would have been some growth.

The proportion in shares grew from 36.8% to 39.5%. That’s a lift of 2.7 percentage points, or an increase of 7.3%. The stockmarket certainly rose more than that (approximately 17% including dividends), so on balance the flow wasn’t to here.

There is really only one surprise in what shares are being held, in my opinion. The four major banks and Telstra take out five of the top seven positions, with BHP Billiton coming in at third.

The stranger? Fortescue Metals Group is the fourth most widely held direct share in SMSFs in the Multiport survey, behind Commonwealth Bank, Westpac and BHP, but ahead of ANZ, Telstra, National Australia Bank, Woolworths, Wesfarmers and Woodside.

The rise in international equity holdings was far more marked. Holdings there rose from 7.9% to 10.8%, an increase of 36.7% over the period. International shares were the best performing asset class in calendar 2013, which explains a part of the gain, but there was certainly a shift of money directly into the asset class.

And SMSF trustees appear to have also tried to find a home for money in fixed interest, which lifted from 11.2% to 12.1%, far outweighing the performance of this asset class, which was in the 1-3% range for the period.

Money is still flowing into fixed interest – where Multiport includes term deposits of longer than a year – despite fixed interest having run its race between early 2008 and early 2013.

When it came to cash, it was short-term deposits (less than one year) that were discarded. Term deposits fell from 9.8% of all holdings to 7%, a fall of 28.6%, while traditional cash fell from 14.7% to 12.1%, a smaller fall of 17.7%.

The great rush to geared property investment? While borrowings for property are certainly on the rise, it is still not the big event that is likely to concern lawmakers.

Exposure to property actually fell over the year, from 18.9% to 17.6%. Of that, the vast majority of property ownership is direct, with less than 4 percentage points of that in listed property, managed funds and syndicates.

About 16.1% of all SMSFs have some sort of borrowing arrangement in the fund.

Those SMSFs using a limited recourse borrowing arrangement to hold their property is, however, on the rise. Over the course of the year, it rose from 29.1% of all direct property holdings to 34.6%.

While about 58% of loans are for property and about 42% are for “financial assets” (such as shares), five dollars out of every six in loans in a super fund is for property, rather than financial assets. This imbalance is partly because of the size of the loans – the average property loan is $256,000, while the average financial asset loan is $71,000.

Lastly, it appears that contributions to super are on the rise again, after a period of falling in line with the cuts made to concessional contributions limits.

The average contributions for the December quarter increased from $9,417 to $10,829. This will be linked to both the increase in the Superannuation Guarantee rate from 9% to 9.25% and the lift in the concessional contributions cap from $25,000 to $35,000 for the over 60s.

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: bruce@castellanfinancial.com.au
Graph for SMSF money trail changes course

  • News reports on Monday afternoon, March 24, suggest Finance Minister Mathias Cormann – who is taking over the portfolio of sidelined Assistant Treasurer, Arthur Sinodinos – plans to freeze the financial advice reform changes that had been planned by the Abbott Government. However, when contacted by Eureka Report the minister’s office denied the changes would be frozen. Minister Cormann was quoted earlier in the day suggesting:  “I’ve just got in the job and have decided to pause the process on the FOFA(Future of Financial Advice) regulation to enable me to consult in good faith with all relevant stakeholders before pushing the ‘go’ button on all our changes.”  Legislation to roll back Labour government financial advice reforms was introduced to Parliament last Wednesday March 19.
  • The SMSF Professionals’ Association of Australia (SPAA) has supported the federal government’s decision to change how best interest duty (BID) works as part of the FoFA reforms. “The existing legislation had the potential to be too broad in its application, to create uncertainty and to cause a high compliance burden for financial advisors,” SPAA chief executive Andrea Slattery said. The SPAA also rejects that the changes harm BID’s effectiveness.
  • The rate in which SMSF trustees are investing in residential property in Australia is slowing, according to Credit Suisse analyst Hasan Tevfik. He pointed out that while SMSF trustees put just over $1.4 billion into residential property in 2012-13, he expects them to only invest $700 million this financial year. On the other hand, Chinese investors are investing $5.4 billion a year into the asset class, estimates Tevfik.
  • High-net wealth investors have collectively invested 31% ($430 billion) into assets via SMSFs, according to Investment Trends’ 2013 High Net Worth Investor Report. The report also found that these investors – defined by having more than $1 million in assets outside of their home, business, or superannuation – increased their proportion of assets into shares by 26% to 32%.