Time to get into some super rebalancing

Whether you're a do-it-yourself superannuation investor, or have your super in a managed super scheme, you owe it to yourself to do a full review of your super portfolio now to ensure you are best positioned for growth.

Although monitoring your super portfolio and making adjustments along the way should be a continuous process through the year, the end of the year should at least be a trigger point if you're a less active DIY fund manager.

Now is the time to review your holdings in shares, bonds, cash and other assets including property, ultimately to see what scope there is for improving your overall portfolio growth returns, or to hedge against risk if your agenda is to be more defensive.

Data from SuperRatings to October 31, 2016, shows typical balanced funds have produced an average annual return of just over 8.80 per cent for the past five years, slightly underperforming the Australian share market's 9.04 per cent. Those in high growth options have achieved average returns of 10.09 per cent over five years.

Cash returns over the same period have averaged just 2.60 per cent, reflecting record low interest rates in Australia and across the world.

As always, diversification is a key investment strategy and, as a first objective, super investors should be aiming to preserve their base capital as much as possible, which needs to involve a strategic investment plan that actually beats inflation.

Starting the process

If you haven't reviewed your portfolio for a while, a good first step is to review your general asset allocations. It's good to make this into a regular habit.

Click to InvestSMART's free portfolio manager tool here to enter your asset details and view your current asset allocation ratio, based on your specific investment goals.

According to data from the SMSF Association, most self-managed funds have 30 per cent of their funds in Australian equities, followed by cash and term deposits (26 per cent), and listed and unlisted trusts and other managed investments (19 per cent). Overseas investments accounted for just 1 per cent.

This data suggests that a high percentage of Australian self-managed investors have poor asset allocations, with too much exposure to low-returning assets such as fixed interest and cash, and too little to international equities. Keep in mind that the Australian share market represents only around 2 per cent of the global market.

Equities

In terms of equities, as well as having exposure to the blue chips, investors should really be building stakes in a mix of stocks that, on current trading levels, are undervalued.

Holding a portfolio of blue chip stocks alone has not really delivered brilliant returns, even when you just stick to the top 20 listed companies by market capitalisation, with a number just barely ahead of where they were a year ago.

Picking the undervalued stocks is not always easy, but a good starting point would be to look at major stocks with sound businesses that may have suffered as a result of current economic or market conditions.

Also look at the good dividend payers, to ensure there is a steady flow of funds into your account, ideally where the dividends are fully franked so the tax has been paid.

A good equities portfolio also needs to have a sprinkling of well-positioned smaller capitalised stocks, each with positive growth stories, and even some fixed-interest securities (bonds, at-call cash or term deposits) to lock in a capital protected income stream.

Fixed interest

As a DIY super investor, working out how much you allocate to cash and bonds should be based on the minimum capital you need to protect your overall financial goals.

Over time, fixed interest and cash have delivered lower returns, so over-exposure in these asset classes is not recommended for those seeking capital growth. They are primarily used as defensive assets that deliver regular income.

Those drawing a pension should ensure they have sufficient cash in their account to cover their minimum age-based drawdown requirements, as stipulated by the Federal Government.

Time to act

Changes to superannuation legislation in the latest budget mean now is a good time for many to push more money into their super before July 1, when new lower contribution limits take effect and when higher taxes will be payable for those earning more than $250,000 per annum.

From an asset allocation perspective, now is also a good time to look at doing some rebalancing with a well-researched strategy that, as best as possible, takes a big picture view of the known investment universe.