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SMSFs on verge of diversification disaster

Even amid falling interest rates, SMSFs allocated record amounts to Australian cash investments in the June quarter and virtually ignored overseas assets despite returns being pumped up by a falling Australian dollar, according to global brokerage firm Invast.

The asset class now represented around 27 per cent of all SMSF assets, Invast Australia chairman Gavin White said.

New ATO data revealed SMSF assets dipped slightly to $589.9 billion in the June quarter, down from $600.3 billion the previous quarter.

Australian share holdings dropped to $187.1 billion from $199.3 billion during the quarter, in line with the falling share market, but represented almost one-third of all SMSF assets.

SMSFs invested $1.8 billion in international shares in the June quarter, or less than 1 per cent of their portfolios, while they invested $533 million in offshore managed investments and $329 million in offshore property.

In contrast, SMSFs’ holdings of cash and term deposits jumped to $157.7 billion in the June quarter from $155.7 billion, which marked a new record high.

White said the numbers highlighted a huge home investment bias, which was potentially harming investment returns for most SMSFs and exposing them to huge risks should the local share market correct itself more than those offshore.

“SMSF portfolios often lack any basic degree of diversification into overseas assets given their huge concentration on Australian equity and cash investments,” he said, adding the problems were twofold.

“First, investors are missing out on often superior returns offered by offshore financial markets, with the ASX/S&P 200 well underperforming the United States stock market and underperforming most European markets over the past year.

“SMSFs are missing out on booming sectors, such as the all-important healthcare and technology industries, for example, which aren’t well-represented in the ASX/S&P 200, while they have overdosed on bank and resource shares.”

The second problem with lack of diversification offshore was that Australian SMSF investors were missing out on currency depreciation benefits, he said.

“If SMSFs have offshore investments denominated in offshore currencies such as the US dollar, to the extent that the Australian dollar falls, investors will gain some returns on the back of their unhedged international investments, which works to offset losses on their Australian investments if the local share market falls,” he said.

“Given we can expect sustained weakness from the Australian dollar, this means many SMSF investors are missing out on an important risk buffer offered by a falling local currency.”

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