Trustees seek yield safety

PORTFOLIO POINT: Many SMSF trustees, particularly those nearing or in retirement, are choosing bank accounts as their investment of choice.

A large number of self-managed superannuation fund trustees chose to forsake the higher returns from the equity market during the September quarter and keep their money in the bank.

Why? Because they are happy to earn lower yields and preserve their investment capital.

Given the choice of a stable, middling return, the low returns from cash in the bank are being taken over the chance for potentially higher, though more volatile, returns from shares.

And given that equities generally have returned little, or negative returns (depending on your starting reference point) in recent years, the relatively boring returns of 4%-7% achieved from cash has been, well, money in the bank. This is despite the good fully franked dividend yields over time from the major banks and the likes of Telstra, which are delivering average returns above 6%.

Last week I wrote about the latest data-mining report from SMSF services provider Multiport, which stated that SMSFs appear to have missed the huge upswing that occurred in equities and listed property during the September quarter (see Cashed out).

I asked Eureka Report subscribers to email me with why they missed it, and I got dozens of replies. Thank you.

The responses weren’t unanimous, but the consensus was certainly overwhelming. Most of the responses confirmed exactly what I’d proffered as the reasons.

And I asked last week: “Was it inertia? Was it fear of another false rally? Fatigue? A sense that lower-risk assets will provide what you’re after, without having to bet on the volatility of equities? Just sitting on the sidelines for now?”

Here is a collection of the responses:

“We are in our sixties and just have this fear of our capital going down and have really taken a holiday from equities for the time being (after being burnt by equities in the past). Let me tell you that it’s a great feeling knowing that we have this regular monthly income coming in (from term deposits).

“We stayed and probably will continue to stay in term deposits and a couple of residential property investments because I don’t have to lose sleep worrying about volatile returns and, more importantly, we can live comfortably on the returns we get. We locked into longer-term deposits some time ago, so it’s set and almost forget, although obviously at some point we will have to accept the lower returns available in the cycle of lower interest rates.

“Equities are just too high maintenance for many people like us who are in our early sixties. We sold our business 10 years ago and only with a sixth sense did we emerge from the GFC relatively unscathed as we sold almost all our shares in late 2007 and converted to TDs.”

Part timing, part fear of the loss of capital, part locking in something that could be framed for some as already having “an elegant sufficiency”.

The central point of my column, if not the research, was that SMSFs actually looked to be pulling money out of equities and property during those three months, even as returns were screaming ahead.

More and more investors, clearly, prefer to stick with cash-like returns. “A 99.9% probability of a return of 5% beats a potential return of 15%, that might become minus 5%.”

Despite what some readers suggested, I wasn’t making a value judgement on those avoiding equities.

Said one reader: “It somewhat annoys me that you ask the question, because the underlying premise seems to be that these investors should not take this approach!”

And another: “I guess my point is many financial advisors pick on a trend and support an investment view that might encourage investors to make radical portfolio changes that might make sense in the short term, but could have longer-term implications.”

No, that’s not correct. I wasn’t suggesting anything. (As my previous columns will attest, I’m not even really a believer in active investment strategies.) What I was saying is that SMSF trustees were continuing to pull money out of equities in the September quarter, as it was actually rallying. That suggests active management – actively avoiding risk, even if it’s working in your favour at the time.

And that’s what the figures were suggesting. You were pulling money out of shares during that quarter.

I simply wanted to know why. (It was a sociology/psychology question.) And one of those same two readers told me exactly why.

“I contend that the reason most investors retain high cash weightings is because they anticipate a further world growth asset downturn in the near future, and the number one imperative is preservation of capital.”

That opinion was widely held. Preservation of capital is utmost on the minds of many.

“I am a self-funded retiree and just scared now of losing money ... There’s no second chance for me to work and make up the losses ... I’m sure heaps of people in my position have lost confidence to reinvest in the market.”

From the responses, many Eureka Report readers had shown great foresight, even bravery, in getting out of equities in recent years.

I’m not a fan of the term, but Multiport’s figures suggest there was a serious “risk-off” approach taken during the September quarter, as equities were sprinting. One of their many quarterly sprints, which are followed by equally hasty retreats, I accept.

An accountant from a firm with a number of SMSF clients said that he has watched even his bullish clients reweight from 80% equities before the GFC to about 50% now. Many of the rest are now out of equities entirely.

“I can’t see many 60 investors moving back to equities for some time ... I would say that they don’t believe the rally is sustainable and worth the risk. (Their) lifestyles have been adjusted and these self-funded retirees are battening down the hatches. They’ve been through one storm and didn’t like the feel of it. It’s going to be a while till they stick their heads out again.”

Another: “I suggest what a lot of you who write and opine on investment matters misunderstand is most of us are not active participants in the markets. I am focused on capital protection.”

Former Treasury Secretary Ken Henry is one of many who believe that Australian investors are, and probably always will be, massively overweight equities. We’re taking too much risk, says Ken, who believes that we should have less money on the casino table, and more in the “surer” things of cash and bonds.

He’s not alone.

By world standards, Australian super investors have a big appetite for risk. The rest of the world, apparently, is far more evenly weighted into fixed interest and cash than we are. We love our property and we love our shares.

Maybe that’s changing. And maybe SMSF trustees are at the forefront.

But in any case, I love some people’s honesty. And the following reader’s comment was, exactly, answering my question about selling out of equities during the September 2012 quarter.

“I’m siphoning funds into a cash account to buy a motor home; nothing to do with anything else.”

Well, may your road trip be long and safe.

To read reader responses, click here.

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 Australian Taxation Office (ATO) has warned SMSF investors about the legal complications around arrangements to buy property in a self-managed fund. In Taxpayer Alert 2012/7, which can be found in full here, the ATO said trustees and advisors must ensure any arrangements entered into for SMSF property investment are properly implemented, “particularly those involving limited recourse borrowing arrangements (LRBA) or the use of a related unit trust”. The ATO said it was concerned “some of these arrangements, if structured incorrectly, cannot simply be restructured or rectified; and unwinding the arrangement may involve a forced sale of the asset which could cause a substantial loss to the fund.”
• Providing further details for investors on borrowing agreements, the SMSF Professionals Association of Australia (SPAA), has put out a comprehensive fact sheet detailing the risks. SPAA technical director Peter Burgess said: “A gearing strategy can assist people grow their retirement savings, but there are significant risks that must be considered before embarking on this strategy; it’s very much a case of look before you leap.” The fact sheet is designed for practitioners to give to clients, as SPAA said it was concerned some people “saw this type of borrowing as a way into a property investment without realising the potential downside”.
• DBA Lawyers also weighed in on the borrowing issue, saying the taxpayer alert raises both good and bad news. The SMSF specialist lawyers said the problem of the timing of the establishment of the holding trust can be “at odds with industry practice and with how many limited recourse borrowing arrangements have been set up”. However it also said the “good news” is that “the ATO have confirmed the ability for SMSFs to acquire certain units from related parties. This opens the door to strategic opportunities.”
• The latest data from super specialist Chant West has found that over in traditional super funds, growth-focussed funds are again outperforming conservative allocations. Funds with asset allocations towards growth of more than 60% outperformed conservative funds over a one-month and one-year time frame – however still lagged performance significantly over the three-year, five-year and seven-year timeframes.