SMSFs could soon start to experience the adverse effects of their continued large portfolio allocations to cash, according to Market Vectors Australia managing director Arian Neiron.
The latest Australian Taxation Office (ATO) statistics revealed cash investments rose by 1.6 per cent in the March quarter 2014, totalling $156.2 billion compared to $153.7 billion at the end of December 2013.
In addition, the data showed cash investments still made up 28 per cent of the $558.6 billion total assets held by SMSFs.
“Given that inflation could head higher and cash rates could remain steady, SMSFs are risking value erosion by being so heavily invested in cash,” Neiron said.
“Annual inflation was 2.9 per cent, so the real returns on cash investments are close to zero; add in tax and you are in negative territory.
“The Reserve Bank has this week indicated that it is not likely to raise interest rates anytime soon and banks have lowered rates on term deposits. SMSF investors should consider their options to protect against rising inflation.”
He did, however, acknowledge SMSF allocations to cash were not growing as fast as before.
“One positive aspect of the data released by the ATO is that it reveals the quarterly growth rate in cash investments has slowed to 1.6 per cent from 2.1 per cent a year earlier, highlighting that SMSFs’ appetite for cash investments could be waning,” he said.
Exchange-traded funds (ETF) continued to gain in popularity with the sector, reflected in the regulator’s data that showed investments in listed trusts jumped from $19.9 billion in December 2013 to $20.4 billion in March 2014, a rise of 2.3 per cent, he said.
“SMSFs are adopting ETFs at a greater rate due to their instant diversification via a hassle-free trade all with the benefit of liquidity and full transparency,” he said.
“Through diversification, ETFs may help SMSFs to reduce risk in their portfolios.
“They offer lower fees, full transparency of holdings and potential tax efficiencies, all of which are important to SMSF trustees.”
