Diversification within your self managed super fund

Administering and ReportingSMSF InsightsUnderstanding SMSFs

Diversification within your self managed super fund

You don’t put money into your SMSF for it to sit in cash for 30 years or more. Your intention is to invest for your retirement and to get the best return you can now to ensure you have enough to live comfortably when that time comes.

You don’t put money into your SMSF for it to sit in cash for 30 years or more. Your intention is to invest for your retirement and to get the best return you can now to ensure you have enough to live comfortably when that time comes.

When you are investing your savings in your SMSF however, it is not just a case of choosing some assets and monitoring your choices for performance. There is much more to investing for your retirement.

The SMSF sector overview

The SMSF sector is an important part of the superannuation system in Australia.

As at 30 June 2017, there was approximately $700 billion in assets in 600,000 SMSFs. This represented 32.6% of the total superannuation market of $2.33 trillion. There were 1.24 million trustees or directors of corporate trustees with average fund assets of $1.127 million and member account balances of $600,000.

By any measure, this represents a significant and important retirement savings sector in Australia.

Asset allocation in the SMSF sector

Australian Taxation Office data for the year ended 30 June 2017 shows that SMSFs invest the majority of their money in three key asset classes, being:

  • 31% in direct Australian listed shares
  • 25% in cash and term deposits
  • 15.5% in direct Australian property.

Interestingly, these broad percentages have not changed significantly over time, even as the total value of the SMSF sector has increased.

The same ATO data as at 30 June 2004, for example, shows the asset allocation split to be:

  • 31% in direct Australian listed shares
  • 22% in cash and term deposits
  • 12% in direct Australian property.

This relative consistency in asset allocation between these three asset classes has served the SMSF sector well in some investment cycles, and less well in others over recent years. It is the SMSF sector preference for direct investments into listed Australian shares, cash and direct property which provides the control sought by investors in this sector but has also resulted in a comparative lack of asset class diversification which has also cost the sector relative investment performance in some years.

When compared to a typical balanced portfolio, for example, it is possible to see a reduced exposure to Australian listed shares, cash and direct property in favour of additional exposure to international listed shares, Australian and international fixed interest and both listed and unlisted property trusts. The comparatively small exposure to international investments in favour of Australian assets is understandable but also potentially costly. Australia represents a very small percentage of the global listed shares and property markets. This additional concentration of particular assets classes by region only serves to heighten the investment risk inherent in such an asset allocation approach.

So, what is the happy compromise?

Sorry, this content is reserved for members of our SMSF Connect community.

Please register for a free community account to view this content or login below.

Login

If you are an existing member of SMSF Connect, please login below.

If you wish to learn more about joining the community, please click here.

Join the free community

Complete the form below to set up your free account and be regularly updated on SMSF and investing news and information.

  • Strength indicator