SMSFs were once criticised for their large cash holdings. Then the world changed.
Australian and international shares, listed and direct property, infrastructure and alternative assets: none was spared as the global financial crisis (GFC) routed markets in 2008. Low-returning sectors that were once spurned – such as cash and other defensive assets – quickly proved an oasis in a sea of red.
Fast-forward four years and cash is still king.
“Since the GFC, people did move to cash,” UBS Wealth Management Australia director David Rolleston says. “There was a flight to perceived safety and it’s been a slow process back into a proper long-term weighting for retirement.”
The flight to cash occurred across the industry, although the typical self-managed super fund (SMSF) has often been an unfair target of criticism both pre- and post-GFC.
Since the Australian Taxation Office (ATO) began tracking the sector in 2004, SMSFs’ cash allocations have varied from a low of 22 per cent to 30.6 per cent in 2009. However, these 30 June sector snapshots tend to overestimate cash holdings, says Rice Warner Actuaries principal Alun Stevens.
“That’s just at the time when people make their contributions because SMSFs classically pay one contribution a year and it’s paid in June,” Stevens says, noting that about half of SMSF investors are drawing down pensions.
“If you have a set of assets heavily skewed into that post-retirement phase, you also expect them to have a much higher allocation to cash and related instruments.”
It is that level of individual control in difficult market conditions that has underpinned the recent explosive growth in SMSFs. The sector grew twice as fast as any other class of super over the five years to June 2010, according to ATO data, and the number of new SMSFs launched rose to about 25,000 a year.
“Whenever you get bad returns you get an increased interest in SMSFs,” says Stevens, who manages his own SMSF.
The SMSF sector grew twice as fast as any other class of super over the five years to June 2010.
Rice Warner predicts the present 30 per cent SMSF market will remain steady as the entire superannuation industry grows from A$1.3 trillion to A$3.3 trillion by 2026. However, the total number of SMSF investors is likely to increase, with their fresh fund inflows offsetting the effects of retirees drawing down savings.
Much of the current growth is directed towards cash, term deposits and even hybrid securities that pay high dividends, say advisers and accountants.
Self-Managed Superannuation Fund Professionals’ Association chairman Sharyn Long says that while investors retain a healthy exposure to shares, their reasons for investing in cash have changed over the past year.
“They weren’t necessarily risk averse – they were waiting for the appropriate opportunity to invest that cash,” she says. “That has shifted – feedback is that there is more risk aversion.”
HLB Mann Judd’s director of superannuation, Andrew Yee, says many of his SMSF clients are chasing term deposit rates – offering returns of between 5 and 6 per cent – as uncertainty over the economic situation in Europe clouds the broader outlook.
“The past six months have been pretty dire for stockbrokers as people move to cash and fixed interest,” Yee says.
This is a common refrain as SMSF investors wait out market volatility after another disappointing year.
Stevens says that industry funds have also shifted new investor contributions and dividend returns towards cash since the GFC.
“They slapped lots of it towards cash and short-dated, fixed interest-type securities to keep them out of asset value declines and also to give them the liquidity they needed to make switches,” he says.
The A$43 billion AustralianSuper fund has been one of those funds and, last November, it expanded its ASX200 share investment option to include the top 300 Australian stocks, exchange-traded funds, term deposits and cash.
The newly badged Member Direct option has attracted A$120 million, of which about 80 per cent has been split evenly between term deposits and cash, according to a spokeswoman.
But has the pendulum swung too far towards defensive assets? A number of recent SMSF surveys reveal the magnitude of the swing.
Last September a Vanguard/Investment Trends survey of more than 3000 SMSF trustees found allocations to cash had increased by A$40 billion since May 2009 to A$113 billion. The survey classed about 35 per cent of total cash holdings as “excess cash” that would normally be invested in other asset classes if investors were not so wary about market volatility (although that excess cash level was still well below a 53 per cent estimate in May 2009).
A survey by SMSF administrator Multiport of 1600 funds holding A$1.3 billion in assets shows a similar shift to cash last year. Cash and short-term deposits rose to 26.7 per cent of assets, up from 21.9 per cent in December 2010. At the same time, exposure to Australian shares fell to 35.4 per cent, from 41.4 per cent.
Hewison Private Wealth client adviser Chris Morcom says investors, still concerned with the economic downturn in Europe, are trying to time the market.
“The problem with that is that no-one is going to ring the bell to tell them when to invest again,” Morcom says. “Our biggest concern is that while people are sitting on cash, the real value of that capital is being eroded and that could lead to permanent losses if they don’t get back into the markets. It’s completely at odds with our way of investing.”
He encourages investors to stick with their long-term strategic asset allocation and regularly rebalance as particular asset classes rise and fall. “That in itself gives protection from the highs and lows of the market.”
In January, Deutsche Bank analysts forecast a double-digit rise in the value of the ASX200 to 4700 points by year end, noting that underlying corporate earnings had risen over this year even as the market fell.
However, convincing nervous investors that the market is set to rebound remains difficult.
Rolleston says there are some signs investors are moving back to a more balanced investment portfolio. An investor with a conservative risk appetite may have up to 50 per cent of their assets in cash and fixed interest while someone with an aggressive investment appetite may hold just 10-20 per cent.
“Deep down, people’s risk profiles probably never change but on the surface there’s been a massive movement to conservatism,” he says. “People are becoming more moderate, which would be somewhere between 20-30 per cent in fixed income and the balance in growth, including property, but it’s a slow process.”
In summary, he says times of absolute despair are often the best times to jump straight back into aggressive investment, but “people don’t do that”.
This article is from April 2012 issue of INTHEBLACK.