SMSFs become a distorting force

When it comes to throwing its weight around, there is one super fund that can put quakes and quivers into the spines of board directors globally.

CalPERS, the California Public Employees’ Retirement System, can pressure and coerce huge global companies (including our own BHP Billiton recently) when it doesn’t like a decision, direction or policy.

The public-sector fund manages more than $280 billion, but it is the super fund for just one US state. (By comparison, Australia’s own Future Fund is worth about $92 billion.)

UniSuper is also making its $30 billion count with a threat to derail Westfield Group’s split of its Australasian and international operations. UniSuper holds 7.27% of Westfield Retail Trust and doesn’t like the deal, claiming the multiple being requested for WRT to purchase Westfield Group’s Australia and New Zealand management and development business is too high.

But it’s not just the big guys who move markets or change investment decisions.

Australia’s SMSF market is fast proving that weight of numbers can have the same impact.

Global merchant bank Credit Suisse warned last week that investment decisions being made by SMSFs are distorting investment markets. They have gone to the extent of making some recommendations to investors to not get offside, or out of whack, with Australia’s single-largest superannuation player.

First, Credit Suisse argues, accept that SMSFs have their favourites, which include the likes of Australia’s banks and Telstra, so don’t short those stocks. Second, dividend yields are precious to SMSFs, so high-yielding stocks, or those likely to increase their payouts, are ones to watch.

And, as a result, be aware that SMSFs are not necessarily interested in financing growth stocks.

Union heavyweight Paul Howes, of the Australian Workers’ Union, has also voiced concerns about the power of SMSFs, particularly as it relates to property investment. This comes at a time when there is a threat to the governance of Australian Prudential Regulation Authority-regulated funds.

Loading up on equities

As Alan Kohler pointed out in his Weekend Briefing on Saturday, the chase for yield has been running for so long now that it has to, surely, be close to coming to an end. Rising equity prices will eventually make high-yielding stocks come back to middling yields. Something else will take its place. It could be mining, energy or cyclical stocks, or something else completely.

But what’s far more interesting is to find out what you’ve been doing, as an indication of where you believe returns lie. (And I haven’t gone into great depth on that for a while.) The following stats are from the latest Australian Tax Office SMSF statistical data.

SMSFs have been loading up on equities. When the Australian market bottomed in the March quarter of 2009, SMSFs were holding just $77 billion worth of domestic equities. That had risen by 123% to $171.8 billion at the end of September 2013.

The Australian market itself only put on around 40% during that time (though that figure does not directly include the reinvestment of dividends). Over and above any growth in listed securities, SMSFs are expected to tip another $8 billion a year into the local bourse.

The amount invested in international shares has risen from $651 million to $2.08 billion over the same period. That is a more than tripling of exposure to that asset class over the same period, suggesting that at least some SMSFs have heard calls they are woefully underinvested in this asset class.

Cash is one of the asset classes in SMSFs that rarely, if ever, seems to go backwards, not even to plough money into equities when prices are low.

In March 2009, SMSFs were holding $95.2 billion in cash, and this had grown steadily to $154.1 billion by the September 2013 quarter.

Residential property has grown from a touch over $11 billion to $18.6 billion. Hardly the explosion in this asset class that many had feared with the advent of being able to borrow to purchase properties.

Limited recourse borrowing arrangements (LRBAs) grew from $497 million in June 2009 to $2.62 billion in September 2013. While this is a five-fold increase, it needs to be put in the context that SMSF borrowing (outside of instalment warrants and internally geared funds) really only became an opportunity for SMSFs in September 2007 and, due to the debt market crisis, not really until early 2010.

Between June 2009 and September 2013, total borrowings in SMSFs increased from approximately $4.8 billion to $11 billion.

SMSF numbers top half a million

Australia’s SMSF sector is now more than 509,000 in number, with nearly one million members. The rate of growth is not slowing. They will continue to increase in prominence, in importance and in influence.

But their very nature means they operate individually and without a mandate that stretches beyond their own membership of no more than four. That’s the way they like it. And the reason the majority of them took control in the first place.

While many trustees will have plenty in common with others, they are individual funds, with individual balances, interests and targets.

They will rarely act as a bloc, preferring their own self-interest, because there’s no-one more interested in the best outcome for their members than they are as trustees. But that doesn’t mean that much of their own personal interest won’t see large numbers of them investing similarly.

They will, increasingly, impact on investment markets. And it would be wise not to bet against them.

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

• The rate at which SMSFs entered into limited recourse borrowing arrangements was similar in the three months to September 2013 to previous quarters, according to the latest Australian Tax Office figures, suggesting fears self-managed funds are causing a bubble in the property market are misplaced. “Borrowing has not increased significantly since 2012 and remains a very small proportion of the total value of loans made by banks,” said Technical and Professional Standards director Graeme Colley of the SMSF Professional’s Association of Australia.
• The ATO figures also showed SMSFs are sticking with cash and term deposits despite the increase in inflation risk amid historically low interest rates. 29.6% of SMSFs held their funds in cash in the three months to September 30, compared to 30.6% in the June quarter. However, asset allocation was the same across the other asset classes.
• The majority of SMSF accountants are refusing to provide online solutions for their clients because of fears of data security, according to the OneVue/Investment Trends 2013 SMSF Accountant Report. Only one-in-five accountants offer an online service, but one-in-four would reconsider if they had data security assurance, the report said.