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SMSFs need to mitigate portfolio risk

Risk tolerance specialist FinaMetrica has raised concerns over the levels of risk incorporated in SMSF portfolios due to a concentration of domestic equities.

In particular, FinaMetrica said now was the time for SMSF members to revisit their investments due to the current state of the Australian equities market.

“SMSFs are continuing to focus their investment efforts in Australia, with a huge bias towards local assets almost to the total exclusion of those offshore,” FinaMetrica co-founder Paul Resnik said.

“This is exposing SMSFs to significant investment risks and they should urgently be reviewing their asset allocations before these risks are crystallised. When Australian markets correct – and they will – SMSFs will be hard hit, given the sheer size of their exposure to Australian shares.”

Resnik was responding to the latest ATO statistics that showed holdings in Australian shares made up 32 per cent of SMSF assets, totalling $176.2 billion. At the same time, $2.4 billion was allocated to international equities, representing 0.4 per cent of SMSF assets.

“If SMSFs look offshore, there are unlimited opportunities to diversify their exposures across different asset classes and geographies, thereby reducing investment risks,” Resnik said.

“The benefits potentially include stronger returns. US markets have, for example, outperformed Australian markets over the past 12 months and the fall in the Australian dollar has magnified returns for international investors.”

He also raised concerns about the continued high allocation to property in SMSF portfolios, reflected at 16 per cent of fund assets in residential and commercial property as reported by the ATO.

“Such a high level of investment in property and shares is probably much more risk than is consistent with SMSF investors’ risk tolerance,” he said.

“They are saving for retirement and such a high exposure to growth assets means SMSFs may be taking on more risk than they need to meet their cash-flow needs.”

He said he was worried SMSF investors were displaying a herd mentality rather than properly assessing market risk.

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