As if self-managed super funds (SMSFs) hadn’t been under the spotlight enough in recent years, now they’re facing a new hurdle – the “lower for longer” dilemma.
We’re talking interest rates. The pressing question is how low can Philip Lowe, the Reserve Bank of Australia Governor, actually go in lowering the cash rate. The great cash rate debate is heating up. It’s hard not to focus on the problem at hand – that is, a slowing global economy – but the possible solutions to generate competitive income in this environment.
Lower for longer is a real dilemma. But in life, and markets, there’s always an element of surprise.
As such, the SMSF movement has been losing fans, according to statistics produced by the Australian Prudential Regulation Authority (APRA). SMSFs grew funds under management by just 1.65 per cent in the last financial year. Retail funds fared even worse, growing business by only 0.5 per cent. That was during a year when industry funds increased funds under management by more than 13.8 per cent.
The number of SMSFs in Australia increased from 583,853 to 599,679 over that same period, a rise of just 2.7 per cent. That’s much slower than the average growth for the last decade for the sector.
What happened to the super darling that once was?
Perhaps more investors tossed super in the ’too hard basket’ after the Royal Commission. With so many red flags raised across the industry, and more regulation and red tape, wealth management is now harder to navigate for those unadvised.
Two hours a week is reportedly what it takes to keep on top of an SMSF. That’s according to the SMSF Association. The peak body landed on that figure after sponsoring a survey that canvassed trustees and would-be trustees earlier this year.
In percentage terms, that’s a little more than one per cent of the week. Less time than that possibly spent watching Stan or Netflix. Maybe slightly less enjoyable, but certainly a more productive use of time.
Now, let’s ask that classic question. Besides Stan and Netflix, what keeps SMSF trustees up at night?
Topping the list, coming in at 27 per cent, was keeping on top of changes in rules of regulations. That was closely followed by choosing investments, at 26 per cent. The impact of regulatory changes (21 per cent), paperwork and administration (18 per cent), and understanding changes to rules and regulations (18 per cent) all ranked highly in terms of concerns too.
With all this in mind, we’re seeing more cases of ‘analysis paralysis’. SMSFs held $171 billion of cash as at March 2019, out of a total of $747 billion in assets. That’s nearly 23 per cent of fund assets in cash. With cash earning very little, some of this allocation may not be attributable to choice. It’s simply too big a basket of cash to put it down to that.
Often, investing is illustrated as a basket of goods. Rather than make you hungry, it’s supposed to encourage you to diversify your investments. If you make a trip to the supermarket, you probably won’t leave with bags of potatoes alone, even if you’re making a potato salad. You get a mix of ingredients. Cash, like potatoes, is only one ingredient in an investment portfolio.
In a lower-for-longer world, the best SMSF trustees can do, is remember why they started the journey in the first place. Diversification is your best chance at catching surprise upside and managing expected downside.
Shares, as the saying goes, do help you eat. However, shares alone don’t make for a balanced diet either. A healthy, balanced portfolio is a mix of different investments.
Diversification has historically been cited as a key reason for opening up an SMSF. What’s most interesting, and prior statistics provide a solid prelude into this, is that SMSFs are currently no more diversified than industry or retail funds. APRA regulates industry, retail, corporate and public sector super funds, while the Australian Tax Office regulates SMSFs. Through this we know that APRA funds are more heavily invested in overseas equities, whereas SMSFs have a marginal, albeit real, bent towards Australian equities.
As we said before, in the post-Royal Commission world, SMSFs are more caught up in reporting and regulation than ever before. Investors are more time-poor, with less capacity to scour the market for opportunities. As a result, there’s a chance some are over-indexing on high-visibility investments, such as passive ETFs, blue-chip shares and cash. Holding the ASX 20 doesn’t make for a diversified portfolio, only diversification across a single asset class. Neither does investing in a fund that tracks the US stock market, despite its many industries, sectors and sub-sectors.
Here’s the thing. If the Reserve Bank of Australia and other central bankers are correct, this ‘lower for longer’ cash rate environment is the precursor to low-growth era. In these times, it’s important to be the right mix of diversified and the right kind of defensive.
SMSFs still represent the biggest individual sector in the super landscape, with a total of $747.6 billion invested, followed by industry funds with $718.7 billion. Retail funds come in third with $625.7 billion. That’s a lot of power to the people, should the people know where to direct their efforts.
Smart investors understand that a cash only investment portfolio won’t get them very far. However, holding cash along with fixed interest investments, property and shares may better round out a portfolio. We offer Trilogy Enhanced Cash, a fund that aims to set investors up to do just that.
Approximately 70 per cent is invested in cash and cash-style products, and the remainder in the Trilogy Monthly Income Trust.
There are solutions to the ‘lower for longer’ problem, sometimes found in places investors are least likely to look.
Again, take last financial year as an example, when term deposits were generating record-low returns as other fixed interest investments produced double digits.
Across the 2019 financial year, bond sector returns ranged from 6.5 per cent to 10.3 per cent, from government bonds, Australian and international fixed interest, and corporate debt. Again, these strong returns came from an asset class considered the next ’safest’ to cash. This was the right kind of defensive.
Just like investment downside, this example highlights that upside can equally catch investors, well, offside.
In a lower-for-longer world, the best SMSF trustees can do is remember why they started the journey in the first place. The desire to diversify. Diversification is your best chance at catching surprise upside and managing expected downside.
This article originally appeared in Issue 04 of Angle Magazine. The material on this website is intended only to provide a summary and general overview on matters of interest. Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.