Winning tips for SMSF diversification

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New research into the top 10 stocks used by SMSFs shows investors favour just a handful of stocks. To get the best results, SMSF investors should be advised to diversify into exchange traded funds, says State Street Global Advisers.

Australian investors are among the highest owners of direct shares in the world. An ASX shares ownership study released earlier this year showed 34% of the adult population holds shares directly and 4% indirectly via managed funds (excluding those held in superannuation funds).

This study identifies SMSFs have an even higher ownership of shares at 52%, consistent over the past four years.

But while there are more than 2,000 companies listed on the ASX, the vast majority of SMSF investments are within a handful of stocks.

According to a Multiport survey in June of over 1,900 SMSFs, these investors held around half of their Australian equity allocation in just 10 companies. These included the big four banks, Telstra and Woolworths.

State Street has broken down the annual returns for these top holdings over the past 10 years, highlighting the best performing and worst performing company for each year.

This year's best perfomer so far has been Westpac, while the worst is Fortescue.

No one company has consistently outperformed others, for example Fortescue’s success in capitalising from a soaring iron ore price the mid 2000’s saw strong rewards for its investors. Yet three of the last five years have seen substantial declines in company value.

“It’s very difficult to predict a winner,” State Street head of SPDR ETFs for Australia, Amanda Skelly, tells Wealth Professional.

“We’d all like to, but companies investors pick might do well one year but poorly the next year. That’s okay... but having an ETF like the STW as a cornerstone of that portfolio can just help smooth out the returns and help smooth out the risks associated with one-time events.”

State Street compared the performance of the top 10 stocks then compared it to the success of the STW, which was found to be a lower-risk investment than the stocks. STW tracks the ASX200 and is Australia’s longest running exchange traded fund, managed by State Street.

It is often hard for advisers to convince SMSF investors to move away from what is familiar, but it is important to take a balanced approach, says Skelly.

“SMSF investors really value holding companies directly, so trying to educate them to move completely out of shares is not the right approach. I think it’s about working with them and what they have, and make them understand they can use other funds like ETF to work with their current portfolio.

“The nice thing with ETFs is SMSF investors can trade it just like they would with companies  they already own – it’s a really simple way to get diversification into portfolio without asking them to do something different  to what they already doing, so that seems to resonate well with financial advisers.”

STW is already the most widely held ETF by SMSF investors, with one in every four ETF investor holding it as part of their investment portfolio.