SMSF asset allocation unchanged since the crisis

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For the past five years, asset allocation has stayed reasonably static for SMSFs. State Street Global Advisers (SSgA) has been looking into the trend and what it has meant for investors.

“Going back right to 2008 – financial crisis time – the asset allocation hasn’t changed for the average SMSF investor,” says Amanda Skelly, head of SPDR ETFs for SSgA. “It’s moved a few percentage [points] over certain periods, but by and large it’s been fairly static…I’m not saying that’s a dire approach, but you do miss certain market opportunities that present themselves.”

Skelly doesn’t rely solely on research; she has seen firsthand, the effect that an unchanged asset allocation can have on an investor.

When Skelly’s granddad was retiring around 2002, he was still in equities because nothing had changed in his asset allocation. Skelly says that when things went wrong, and he was still in equities, he didn’t have the time to make that money back. And there are more people in exactly the same boat.

“If you take examples.. like the financial crisis, if people had a systematic way that tells them if you could switch to a more attractively valued asset class, you could definitely capture more opportunities, which would result in a higher return for your portfolio,” says Skelly, discussing SSgA’s new Market Regime Indicator tool that gives a signal when something unusual is happening in the market.

The allocation of SMSFs’ assets is, on average, markedly different from that of other superannuation funds. According to the RBA’s Financial Stability Review, domestic equities are the most popular investment choice for SMSFs – as is the case for other fund types – accounting for around one third of their assets. However, SMSFs hold a much smaller share of their assets in foreign equities; their direct holdings of foreign equities are insignificant and their total exposure to the asset class (mainly through managed funds) is also likely to be quite small compared with other funds. SMSFs also hold less debt securities, instead holding a much higher share of their assets in cash.

The Review shows that allocation to cash and equities are roughly the same at 30% each.

“One of the reasons that SMSFs don’t invest much in offshore stocks is because it is fairly cumbersome and expensive to do so,” says Crystal Wealth Partners director John McIlroy.

He also agrees that they are missing out on a tremendous opportunity. Crystal Wealth has teamed with Insync Funds Management  to run the Global Titans portfolio, which is a “very concentrated” model portfolio of stocks listed in the US, UK and Europe.

McIlroy says, “Investing in a concentrated portfolio of exceptional dividend growing companies, with an absolute value bias, will generate attractive long-term returns with less than average volatility.”