SMSF investors: ahead of the game

Jane Hume; SMSF; audit cycle

SMSF investors are driving the agenda when it comes to investment behaviour as they hunt for growth assets to boost their portfolios. Elizabeth Somerville examines where this group is finding opportunities, the factors influencing their decisions and areas to leverage for those providing advice in the sector.

After a long period of allocating large amounts of their investment portfolios to cash, SMSF members are now rediscovering their appetite for growth assets. However, the current state of the Australian equities market means SMSF investors are now having to consider less traditional means to uncover viable growth assets.

This was the key finding of the “SMSF Investor Product Needs Report”, jointly conducted by Investment Trends and Morningstar, on behalf of the SMSF Association. The study, which examined investment patterns among 2681 SMSF investors between 2009 and 2014, revealed although maximising income remains important, a greater focus has been placed on making growth a priority.

Investors are starting to move with “cautious optimism” after the increased volatility, flat markets and lack of confidence that followed the global financial crisis (GFC) began to dissipate, according to Investment Trends senior analyst Recep Peker.

“The markets have been gradually rising since mid-2012 and we found confidence coming back and yields going down,” Peker says.

“As a result, more investors are acknowledging the need for growth in their portfolios.”

In fact, in 2014, 23 per cent of respondents cited maximising capital growth as their main investment goal over the next year, which is the highest level in the past six years, he says.

This is a big change from 2011 where having a growth priority dipped as low as 14 per cent.

However, investors will need to broaden their horizons in order to find opportunities that excel as conventional markets have become over-saturated, thus lowering the returns they can expect, Peker explains.

“Back in 2010, 2011 and 2012, the yield on equities was very attractive, but what’s happened as a result of the rest of the investor population catching on is yields have come down.

“The opportunity or returns that SMSFs were making from dividends are no longer as attractive as they were in the past as the market movements have eliminated the big yield gains investors used to get.”

Ahead of the pack

SMSF investors driving investment behaviour is representative of the diversity and flexibility of these individuals, SMSF Association chief executive Andrea Slattery observes.

Reflecting on the report’s main finding, Slattery says: “The fact that SMSF trustees are leading investment trends in Australia by up to 12 months over other areas of investment is a huge thing.

“They were versatile enough, flexible enough and nimble enough to be able to be involved in trends before others in the market.”

Further, she says she feels this demonstrates the receptiveness of SMSF trustees to professional advice and their willingness to access investment insight across a range of areas from experts within the sector.

“It validates their needs, which are not homogenous,” she says.

“The more capable the adviser is, no matter what background, the better that the relationship with the client is and the more likely the investors will use them for multiple services and opportunities.”

Areas to excel

One type of investment vehicle SMSF investors continue to gravitate towards is exchange traded-funds (ETF), Peker says, adding listed investment companies (LIC) are also proving popular with this market segment.

“Both ETFs and LICs have been on a growth path over the past three years, especially ETFs, although hybrid securities dipped slightly in 2014 compared with 2013,” he explains.

“LICs have been growing in portfolios for a while now. In 2012, just over 10 per cent of SMSFs used them, and by the end of 2014 it had reached 14 per cent of SMSF portfolios holding LICs.

“What’s also grown rapidly are ETFs, which have increased from 6 to 13 per cent over the same time horizon.”

He identifies these trends as an outcome of trustees’ priorities shifting.

Both product classes provide diversification to overseas markets and a low-cost way of obtaining goals, which enhance their attractiveness in the market, he says.

Slattery agrees with this sentiment and adds the SMSF sector as a whole is continuing to look at new opportunities in the market to continue to diversify and access future investment vehicles, either directly or indirectly.

“SMSF investors are investing in ETFs as they have knowledge about them and have gotten advice on this area,” she says.

“A lot of people are investing in them to get international exposure, so growth in ETFs, LICs and hybrids has been very important for the SMSF sector.”

Further, investors have been targeting these products to broaden the range of asset classes in their portfolio, she says.

A new era for managed funds

As many SMSF trustees are only expecting limited growth within the Australian share market over the next 12 months, they have to look to other investment areas for growth assets, Peker says of the survey’s findings.

“Diversification has spurred appetite among SMSFs,” he says.

“What we’re finding is trustees and investors in general want access to diversified markets, not just domestic, but also international.”

Increasingly, to access these opportunities, they are turning back to managed funds, which fell out of favour in 2012, he adds.

“Prior to 2011, 55 per cent of SMSF investors used to hold managed funds, and by 2013 this was down to about a third.

“In 2014, we saw a small increase in the use of managed funds and the intention to invest increased quite a bit, from 10 per cent in 2013 to 15 per cent.

“This represents about 80,000 SMSFs saying they want to invest in managed funds over the next 12 months.”

AMP Capital head of SMSF Tim Keegan agrees SMSF sentiment toward managed funds has improved, declaring demand from SMSF and self-directed investors has led to a “new era” for these investment instruments.

“If you look at the research over the last couple of years, there’s been a reawakening to managed funds, whereas pre-GFC you could be quite happy with a portfolio in Australian equities, stocks, term deposits and cash,” Keegan explains.

“Fund managers have also woken up to new ways to be interactive and are improving access, communication and transparency around fees.”

He pinpoints the ability of managed funds to facilitate access to overseas markets and asset classes previously the domain of institutional investors, in turn improving portfolio diversity, as another reason for their enhanced popularity.

Favoured markets

As SMSF investors seek growth opportunities offshore, certain markets have proven to be more popular than others.

“The most common international market that SMSF investors have exposure to is the United States, followed by multi-region funds and the Asian market,” Slattery says.

“At the moment, 11 per cent are currently exposed to America, with 22 per cent interested in investing directly in North American investments in the coming year.

“A further 9 per cent are invested in international regions and 17 per cent are interested in engaging in this space over the next 12 months.”

In addition, 5 per cent of SMSF investors are currently invested in Asia, with 12 per cent indicating their desire to tap into this market in the year ahead, she says.

“This shows that SMSF trustees are quite cognisant of international exposure and diversification.”

Broadening investment horizons

The search for growth opportunities and greater diversification has led SMSF trustees to consider non-traditional asset classes, with a current preference for infrastructure and commercial property.

Keegan says: “Listed infrastructure is a niche area and a relatively new asset class.”

But he acknowledges opportunities to access infrastructure remain limited, with only half a dozen stocks on the Australian Securities Exchange that enable this.

Despite this current environment, he predicts infrastructure is one area set to experience phenomenal growth over the next decade to the tune of $57 trillion.

“Of all of our retail flows into infrastructure, 70 per cent are coming from SMSFs,” he says.

“Infrastructure is one of those spaces with steady, reliable cash flows.

“Our research shows that you’re likely to receive 80 per cent of the upside and only 50 per cent of the downside risk in a global recession when invested in infrastructure, making it quite a stable income in the future.”

Slattery says although infrastructure provides a good opportunity for diversification, it remains difficult for retail investors, including those with SMSFs, to access.

“A lot of infrastructure investments in Australia are of the half-a-billion-dollar variety, so they have a very high entry point,” she says.

“As SMSFs have an average balance of $1 million, they don’t have the ability to invest in infrastructure generally.

“The majority of people interested in infrastructure just can’t access it. They either don’t have enough capital to be able to invest or the investments themselves are not providing the appropriate channels.”

Keegan says unfortunately SMSFs wanting to invest in commercial property face a similar access problem to that of infrastructure.

“Commercial property is skewed towards reliable cash flow; it’s really income skewed and it’s almost impossible for SMSFs to replicate by themselves,” he says.

“The key attribute of commercial property is almost the opposite of residential property, so it’s skewed to income, not growth.”

Commercial property provides investors with consistent income flow and minimal risk, as those associated with commercial property are largely around tenant risk, which diversification helps to reduce, he explains.

“Commercial property is a very interesting part of a portfolio that investors should be considering and clearly are already,” he says.

The next step

Currently, both infrastructure and commercial property are able to be accessed through managed funds, as are other difficult to reach asset classes, Keegan says.

“The general rule of thumb is SMSFs are seeking control so are looking for opportunities that they can’t otherwise access themselves,” he says.

“We’re looking at how to take the institutional domain and make it available to SMSFs and doing the same for infrastructure.”

However, Slattery suggests in order to enable easier access to difficult asset classes, the industry needs to undergo some legislative change as happened to ETF markets.

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