Watch for the DIY timing signals

DIY funds must move quickly to understand the new mood in the market and the deeper effects of recent regulatory changes in self-managed super.

Summary: The market’s sharp rise has caught out some SMSF trustees looking to switch from cash to equities. Many self-managed funds lowered their investment in Australian equities in 2012.
Key take-out: Any additional investment in equities should be part of a long-term portfolio strategy.
Key beneficiaries: SMSF trustees and general investors. Category: Portfolio management.

As the Australian share index soared above 5000 this week, many investors in self-managed funds and private savings portfolios were questioning themselves over the decision to adjust their investment in Australian equities to levels at which they were comfortable.

And, of course, that is exactly what I did and what I suggested Eureka readers do. (Review your equities comfort level).

And there is no question that, in the short term, the timing of that decision for some was wrong. But global events could have gone the other way quite easily, and there remain plenty of nasties in the global system that could turn the market.

For long-term investors, having a level of equity investment with which they are comfortable will actually keep them in the market longer than if they are over exposed to equities and then subjected to loss of sleep as the market falls.

This rise has been driven by the very low interest rates that are available around the world and the vast amounts of spare cash. A large amount of this money has found its way into equities to take advantage of what have become high yields.

And, at the same time, shorters in the market have been forced to cover their position, adding to the buying strength. Earlier this week JB Hi-Fi, which had been one of the most heavily shorted stocks in the market, issued a strong result which resulted in a share price rebound: As the stock jumped, many traders were badly caught out who had been betting the stock would drop.

With a changed sentiment in the market, it is interesting to study what trustees of self-managed funds have done in the last year. I was fascinated by a survey of 437 self-managed funds plus high-net-worth individuals, titled Intimate with Self-managed Superannuation. It was commissioned by Russell Investments and the SMSF Professionals’ Association of Australia, and the independent research firm CoreData conducted the survey.

The self-managed funds surveyed lowered their investment in Australian equities from 43.5% in 2011 to 37.1% in 2012. That is still a major investment in Australian equities. For the most part the money went into either cash or term deposits. The level of longer currency term deposits is not disclosed, but I know many Eureka readers took medium- to longer-term investments at interest rates that are much higher than those available today.

But there are other moves that are equally as fascinating. The amount of money being invested by individuals into self-managed funds is falling in line with the reduction in tax deductible investment caps for superannuation. Two years ago, $74,867 was invested in the average self-managed fund. Now it is $53,406. Overall about $16 billion has been invested outside the superannuation movement. The reduction in concessional contributions caps has altered the way in which superannuants in the SMSF sector save for retirement.

More than half (53.4%) of self-managed fund trustees say they will use a different strategy to save for retirement as a result of concessional contribution caps being set at $25,000. Of those that will use a different strategy, 74.6% say that they will invest their savings outside of superannuation. This is followed by 28.2% that say they will use their savings for gearing purposes. For the most part, that means negatively geared dwellings.

Amongst the other strategies now being considered is postponing retirement and going into part-time work instead of full retirement. In addition, increasingly people are relying on savings and other personal assets to fund retirement and are spending more time tailoring their asset and income situations so that they can get access to the CPI-linked aged pension.

This is an unfortunate change to trends last year where people were looking to gradually increase their superannuation rather than have other mechanisms of savings. The $25,000 tax deductible cap has changed the game.

The trustees of self-managed superannuation funds are wary about financial planners because, all too often, planners are perceived to be likely to try and charge a commission fee based on assets rather than time spent and/or flog managed funds where they get a commission.

This is not always fair because a lot more financial planners that are charging fee for service are looking to actually meet the needs of self-managed fund trustees, who prefer direct investments to managed funds.

But there is no doubt that it is the members of the accountancy profession who are the chief advisors to trustees of self-managed funds, and almost half of them are planning to get additional qualifications so that they can maintain that position and expand their advice.

The accountants have done a magnificent job in providing a low-cost advice service accompanied with the accounts and audits. They have left the financial planners and major institutions way behind. I don’t think that trend is going to be reversed, and it is my belief that if the Federal Government tampers with self-managed funds in an unfair way the reaction from the accounting profession will be severe and they will mobilise the small business movement at the next election. .

Tony Abbott is planning enormous investment in infrastructure (not just dams), and to do that he is going to need the financial backing of the superannuation fund movement. And, when he thinks about it, he will discover that the self- managed funds are the best possible market to tap because the trustees of these funds are not like conventional pooled funds that are always frightened by money exiting the pool. In the self-managed funds the beneficiaries control what happens themselves, so they don’t need as much liquidity.

Infrastructure can provide an inflation-linked income that is much more secure than ordinary shares – it’s ideal for those that want income for their retirement that has an inflation link.

But unfortunately these sorts of securities are years off and the overseas pension funds have been much more aggressive in buying prime Australian infrastructure assets.

It is possible that Tony Abbott will increase the amount of money you can put into superannuation but tie that additional money to infrastructure investment. That is not a prediction but merely an observation as to the way Abbott may think once he starts to look at how he can fund his infrastructure program. But the infrastructure securities that are created are going to have to be much better than those of the past which left investors floundering with insufficient cash flow to fund payments and massive overestimations of likely income.

My guess is that the new breed of infrastructure securities will carry a government guarantee in the early years to cover any shortfalls.

That way the amount of money raised will be larger and the longer-term cost will be lower because there is not a huge risk in the early years.

The question that many will be asking is, having reduced my exposure to equities should I restore it again?

There is no doubt that some people topped up their cash holdings with a view to investing more favourably later and were clearly caught by the rise in the market.

Others lowered their equities as part of a long-term strategy. People who did this should not lift their equity percentage.

The market has now had a big rise and it looks like it could go higher, but I think I would wait for a correction and more importantly any additional investment in equities should be part of an assessment of just how much money you want in equities longer term. Where Australian self-managed funds are weak is in overseas investment, which means that if the Australian dollar falls their performance will be affected. In my own personal accounts I have covered that with an investment in the international funds management group Templeton, which has excellent overseas listed stocks and is available at a discount to asset backing.

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