subject: Why SMSFs Need To Hold More Overseas Assets [print this page] Why SMSFs Need To Hold More Overseas Assets
Australian Self-Managed Super Funds (SMSFs) are rapidly embracing ETFs for long-term, low-cost index exposure. But ATO data suggests SMSFs on average need to increase their international equity exposure to improve diversification and seize global opportunities.
Much has been made of the boom in SMSF, with the Australian Taxation Office estimating total SMSF assets were $390 billion, or about a third of Australia's total superannuation-invested assets, on June 30. Less considered is how assets are being allocated with SMSFs and whether there is enough diversification and exposure to key investment trends.
More SMSFs are embracing exchange traded funds (ETFs). The consultant Tria Investment Partners estimates that a large percentage of ETF unitholders (up to 40 per cent in some products) are represented by SMSFs. More are starting to use ETFs because they are a simple, low-cost way to get long-term market return in the portfolio core. They are also easier for SMSFs to administer.
Judging by the ATO's SMSF statistical report to June 30, the total SMSF population allocates just under a third of assets in cash and term deposits, another third in listed shares, and about 15 per cent in non-residential and residential property. Surprisingly, this report notes less than 1 per cent of SMSF asset allocations are for overseas shares.
Care is needed with these statistics because the ATO does not break down asset categories into product types. It is likely, for example, that ETFs are included in "other managed investments" of SMSFs, which account for 5.3 per cent of the asset allocation of SMSFs. Still, these figures suggest the average SMSF needs to increase its international equity exposure.
A terrible decade
The reasons are obvious: as long-term wealth-creation vehicles, SMSFs should have more exposure to growth assets, such as international shares. Yes, their performance has been terrible, with the MSCI World ex-Australia Index returning negative 3.6 per cent per annum over 10 years the worst performance of any listed asset class. But most SMSFs have a long-term investment perspective, so greater exposure to growth assets, such as international shares, makes sense.
Such an exposure improves portfolio diversification because there is less correlation between assets. Having an SMSF that consists of mostly top 20 Australian stocks and cash may not provide adequate diversification because the largest blue-chip stocks tend to be more correlated; that is, they move in the same direction. The main way to improve correlations within portfolios is to hold different asset classes.
Long-term opportunities
Holding mostly Australian shares and cash also means the average SMSF is missing out on key long-term investment themes, such as growth in the BRIC economies of Brazil, Russia, India and China. In my view, it makes sense to have some long-term exposure to emerging markets through low-cost ETFs.
There is also a case that after a decade of underperformance, international equities are due for better returns. One thing is clear: the last decade's experience for asset classes is unlikely to be repeated this decade. A gradual recovery in the United States and European economies and a lower Australian dollar could help international equity Australian-dollar returns in the long-term.
Talk to your financial adviser if your SMSF holds a small number of Australian blue-chip shares and cash. The fund may be exposed to unnecessary potential volatility and risk missing key trends, such as emerging markets growth. Consider a core/satellite approach, using ETFs or other products in the SMSF portfolio core to generate a market return from Australian and international shares, and satellites around the core such as direct shares, to provide a return higher than the market.
