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Fixing the SMSF asset imbalance

The emergence of international managed portfolios (or separately managed accounts) and a growing preference among SMSFs for some of the key benefits that direct investing offers could be the tipping point needed to spur a more balanced approach to investing.

Australia’s SMSFs have traditionally had a very limited allocation to international equities. A combination of factors, including cost, difficulty of access, technology limits and a preoccupation with homegrown equities, has been behind this.

But SMSFs’ low allocation to international assets is in strong contrast with the investment portfolios of Australia’s top superannuation funds, which have a much higher interest in global markets. When compared to these sophisticated investors, the investment strategies of SMSFs look clearly unbalanced.

In Hub24’s recent white paper, “International managed portfolios: A gateway for SMSFs to invest overseas”, we examined the allocations of Australia’s 10 largest super funds and compared their average exposures to those of SMSFs. There were some stark differences.

The 10 largest super funds’ average allocations to cash (7 per cent) and Australian equities (24 per cent) were significantly lower than SMSFs (27 per cent and 31.7 per cent, respectively, according to the ATO). These super funds also had substantial allocations to overseas direct equities, at 24 per cent on average, and some as high as 34 per cent. For SMSFs it was just 0.9 per cent.

And although the information from the ATO does not separate locally-domiciled managed funds comprising international assets or exchange-traded funds with international exposure, the comparison of the direct ownership of shares in other markets is still a good indication SMSFs are underweight in global investments.

Even when you factor in some SMSFs possibly having a conservative investment profile as they approach or reach retirement, which automatically means a less significant exposure to international assets, overall it still remains a very low figure.

Enter international managed portfolios

There has been an upturn in SMSFs’ allocation to managed investments in recent years, though still modest, and the arrival of international managed portfolios signals a potential game changer in favour of using a professional manager. This new product structure can satisfy the traditional SMSF bias toward direct assets and address the international asset imbalance at the same time.

The rise of managed portfolios has opened up new opportunities for all SMSFs, in particular those that are served by advisers supported by investment/wrap platforms.

Those SMSFs that are advised are set to spearhead the charge towards a greater rebalancing of SMSF portfolios, given this new easy access to direct international assets.

The benefits of managed portfolios are many, including not only professional investment management and direct asset ownership, but access to dividends, administrative ease and – depending on the platform capability – tax minimisation via capital gains tax modelling and tax parcel optimisation.

And according to Morgan Stanley’s recent paper, “Managed Accounts – Evolution or Revolution?”, these are the very features a more mature SMSF segment is now starting to demand.

The timing for the introduction of managed portfolios couldn’t be better – across Australia’s SMSF community there is a growing realisation of the need to better diversify investments by asset class, industry and region.

So can international managed portfolios fix the SMSF asset imbalance? We believe so.
International managed portfolios are empowering advisers and their clients to access diversification and growth benefits that we believe will result in a sizable increase in SMSF allocations to overseas equities.

At Hub24, we see managed portfolios as the marriage of good advice and good practice and believe they will revolutionise wealth management. Moreover, from an adviser’s perspective, the incorporation of international managed portfolios provides an attractive offering to help target the lucrative unadvised SMSF market.

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