SMSFundamentals | Dec 07 2015
SMSFundamentals is an ongoing feature series dedicated to providing SMSFs (smurfs) with valuable news, investment ideas and services, in line with SMSF requirements and obligations.
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By Greg Peel
Most Australians keep their superannuation in a fund managed by someone else, be it a fund manager, bank, industry fund or whatever. They are happy to leave the responsibility to the so-called experts. Those experts tend to manage super through common or garden balance funds, usually allocating the equity proportion on an index-tracking basis.
Outside of super, there are plenty of retail investors in the Australian market. They would also likely have their super managed elsewhere but wish to participate in the market on their own terms outside of the index-tracking strategy undertaken for their super. One would presume retail traders are relatively active, in that their time horizons are more short-term than super. They are looking for a profit now rather than when they retire.
In between are the self-managed super fund trustees, who choose to set their own retirement portfolios on their own terms. One might presume SMSFs keep an eye on their portfolios on a regular basis but are less inclined to jump in and jump out as might a retail trader, given a longer time horizon of performance.
Retail stockbroker CommSec has found SMSF investors trade twice as often as retail investors. CBA’s Head of SMSF Customers, Mark Evans, said in a press release: “SMSFs are very active in the equities space. Many people often view SMSF accounts as dormant with a lot of long-term investments, however CommSec data shows that this isn’t the case”.
This year the Australian stock market saw the biggest single day’s drop since the GFC, in the week ending August 28, during the Chinese stock market crash. It is unsurprising CommSec registered increased trading volumes during that week, but interesting that increased volumes included SMSFs in there buying.
It would appear the reason so many Australians choose to manage their own super is not just one of avoiding fund manager fees and being locked into large, unwieldy pre-set stock portfolios. SMSFs want to exploit opportunities as they arise.
Less surprising, perhaps, is that SMSFs tend to hold more diversified trading portfolios than retail clients. Among CommSec customers, retail traders hold an average of seven stocks in their portfolio while SMSFs hold fourteen. Here we see the longer term horizon of super investment at play, given diversification reduces portfolio risk. Retail investors are more likely to take a punt on a handful of stocks, with little consideration given to risk reduction.
Yet the level of activity among CommSec’s SMSF customers suggests risk management is not simply a case of balanced, set-and-forget portfolios. Says Mark Evans: “The increase in trading volumes favouring buying during recent volatility shows investors are constantly keeping an eye on the market and dispels the myth that SMSFs are conservative investors”.
SMSF diversification is not just apparent in the number of individual stocks in an average portfolio but in the range of sectors represented by those stocks, CommSec finds. Customers are holding portfolios across as many as twenty sectors.
But for all their diversification and trading activity, a breakdown of the most popular sectors represented in portfolios indicates most SMSF are still stuck in an index mentality. Or at least a large cap mentality. Of CommSec’s positions held for SMSF customers, the banks make up 30%, materials 10%, telcos 7.3%, diversified financials 5.8% and food & staples 5.7%.
There’s your index right there. Despite all that has transpired in 2015, and some of the astonishing performances of stocks outside the top 20, and outside the ASX200, SMSFs still favour the Big Four banks, BHP, Rio, Telstra, AMP and Woolies, if those sector breakdowns are any guide, suggesting 2015 has not been the best year for your average SMSF.
These are no doubt the beaten-down names SMSFs were picking up “cheap” in August, and they’re all cheaper now. If diversification is the goal, perhaps it’s time SMSFs started spreading their investment net a little wider.
Mark Evans points out that to have a truly diversified portfolio, SMSFs need to look across other asset classes, beyond equities, for broad investment opportunities.
FNArena’s regular surveys confirm that beyond equities, property is one asset class well favoured by super investors, along with an allocation to fixed income and a cash balance ready for future deployment.
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