Content provided by Thinktank
Written by Per Amundsen, Head of Research, Thinktank
The resilience of the self-managed super fund (SMSF) sector still surprises some financial market commentators. Although the sector now comprises the largest super sector – $733 billion at 30 June 2020 – it is still subject to a level of unwarranted scrutiny considering how well these funds continue to deliver to their more than 1.1 million members.
Commentators have typically looked at fund performance and costs to mount their arguments against SMSFs. But based on the latest independent Rice Warner research handed down late last year (2020), this is going to become much harder to do. In particular, this research nails the canard that SMSFs are costly, demonstrating that those with balances of $200,000 or more are cost effective compared with the APRA-regulated funds and above $500,000 are the most cost effective. [Remember, about 55% of SMSFs have balances above $500,000.]
It is only when SMSFs have less than $100,000 that they cease to be competitive with APRA-regulated funds, and with balances of less than $50,000 are more expensive than all alternatives. As the research clearly shows, APRA-regulated funds are getting more expensive while SMSF costs fall, with the latter benefiting from technology driven efficiencies.
The research report, which drew on a database of more than 100,000 SMSFs, also has reassuring words to say on investment returns, finding that SMSFs have delivered equivalent returns to those of the APRA sector since 2005 in both good and bad years. “These results may not support the proposition that SMSFs are better investment managers than APRA regulated funds, but they do indicate that members of SMSFs, in aggregate, are not disadvantaged when compared with APRA funds.”
What’s interesting about the performance of SMSFs is that it happens with asset allocations often out of kilter with what would be the accepted norm for an APRA-regulated fund. So much so that in 2019, the ATO wrote to more than 17,000 SMSF trustees who, according to its records, had 90% or more of their funds’ assets invested in a single asset or asset class. The regulator was concerned that these funds had not fully considered the risks of such an investment strategy, and in February 2020 issued extensive guidelines voicing these concerns.
In essence, the ATO said an SMSFs investment strategy should be in writing and tailored to the relevant circumstances of a fund rather than a document that just repeats the words in the legislation. This means detailing all relevant circumstances about fund members (for example, age, employment status and retirement needs) that could influence its risk appetite. A strategy should also explain how a fund’s investments meet each member’s retirement objectives.
That said, it needs to be stressed that investing in one asset, or one asset class, is not of itself a breach of the rules. Although it does ensure that SMSFs’ asset allocation remains hotly debated, a properly considered and regular review of funds’ investment strategy by trustees (typically interpreted as being annually) should lower the temperature around this issue.
Historically, SMSFs have favoured shares/trusts and cash/term deposits, and, as the latest figures from the ATO to 30 June 2020 show, that has not changed, with the former being 32% and the latter 21% of total assets. It means more than half of all SMSF assets are invested in very liquid and, it must be said, low yielding investments. Again, that heavy weighting towards cash often attracts criticism – especially in bull markets. But in 2020, at least, the suspicion must be that such an allocation would have seen as a blessing by many SMSFs considering the COVID-induced market volatility.
Limited Recourse Borrowing Arrangements (LRBAs), which comprise a relatively small segment of total SMSF assets at just under 7%, are another asset that court controversy. This form of debt – the sole preserve of SMSFs – is secured against residential property (5.3% of total assets) and commercial property (10%).
The level of concentration in individual SMSFs is higher than those numbers suggest, but the impact of LRBAs and Real Property investment is not as great as some commentators and the regulators have suggested, although they are up slightly.
From Thinktank’s experience during the COVID crisis, our SMSF-LRBA portfolio, which is similarly diverse compared with the rest of our portfolio, has performed relatively better – an outcome consistent with past experience. It seems the high percentage of owner-occupiers in commercial (“business real property”) real estate works as a positive in stabilising performance during economic difficulty. It may also be because a high percentage of third-party tenants took advantage of rental relief available through COVID’s emergency legislation. And with the economy picking up, so are LRBA loan repayment, even in Victoria as that state re-emerges from its harsh lockdown.
SMSFs are never going to fit an investment straight jacket. That’s what happens when you have more than 1.1 members running more than 600,000 funds – with the evidence to date demonstrating the vast majority have a steady hand on the tiller and are largely achieving their financial goals.