Popular investment themes for SMSFs

Stockspot’s philosophy on investing is that over the long run a portfolio that is well diversified across assets, countries and sectors will give our clients the best risk-adjusted returns.

We built the five core strategies (see graph 1) we offer based on this philosophy. Their aim is to give the best balance of risk and return for any Australian-based investor.

This is also true for SMSF investors, who, depending on their stage of life, should be looking for a portfolio with the right mix of risk and return. Too much risk and you’re likely to be exposed to significant drawdowns when assets such as shares experience periods of negative returns. This may cause sequencing dangers if you’re close to retirement. Too little risk and your portfolio may be unable to provide the level of income and growth needed to keep up with your costs and lifestyle goals.

Our portfolios all aim to give clients the best possible returns without taking unnecessary risk.

While our core portfolios suit the needs of most investors, some of our clients own assets outside of their investment portfolios (such as property), or they want to start investing more in a certain region, asset or market factor (for example, dividends).

In 2016 we introduced Stockspot Themes. The idea is to give clients more control over how their money is invested. It gives clients the ability to add investments they feel strongly about and would like more of as part of their portfolio. Stockspot is the first (and only) automated investment adviser in the world to offer this level of customisation to clients.

We launched 14 different themes that fit into four different groups:

• Australian shares (dividend shares, large companies, small companies, socially responsible shares),

• global shares (United States, non-US, European, Japanese, Chinese, Asian),

• property (Australian property, global property), and

• bonds and cash (high-interest cash, global bonds).

Popular themes: SMSFs tend towards conservative themes

Stockspot Themes has grown in popularity since its launch, particularly among our SMSF clients. For an SMSF, the ability to add an investment theme is appealing since many SMSFs want more control over where their savings are invested without paying high fees to advisers or fund managers. All of the themes we offer are listed exchange-traded funds, so their fees are much lower than traditional active funds.

We found that overall the most popular themes with our SMSFs clients are Australian property, global fixed income and US shares. The themes chosen by our SMSF clients are generally more conservative (lower risk) than those chosen by our non-SMSF clients.

This tallies with ATO research that shows the average age of an SMSF member is 58 and newly registered SMSFs have a younger average age of 49. Typically, investors at this stage of life have additional assets and are seeking a smoother path for their portfolio.

Of particular interest is the preference towards the global fixed income themes. Our core portfolios do not include a global fixed income investment and a large percentage of our SMSFs have chosen to add global fixed interest to reduce their overall portfolio risk.

Why clients choose different themes

Clients who chose a regional focus tend to either be backing momentum (that is, US tech stocks continuing their strong returns) or some mean reversion (Asian shares returning to popularity).

Those who add an asset class such as cash or global bonds are trying to reduce risk in their portfolio due to macroeconomic or political factors. Others who choose property are typically expecting the macro factors that have boosted property prices to continue.

What we see with SMSF investors is a similar bent toward backing themes with momentum, such as US shares, however, their focus is more on stable returns and fixed income diversification, rather than wanting regional tilts.

Interestingly with all clients there appears to be a strong relationship with the most popular themes chosen and the investments that have enjoyed strong performance in the past five years. US shares and dividend shares are the two most popular themes and both have enjoyed strong returns since 2011. On the other hand, Chinese shares and Asian shares are the least popular and have underperformed over the past five years.

This supports the theory that investors have a bias towards momentum and chasing returns.

However, looking in the rear-view mirror to decipher what’s ahead on the road is rather pointless. There’s no proven value looking backwards over a few years when investing, despite the temptation to do so. Historical market evidence suggests the best results actually come from doing the opposite and buying investments when they are less popular because market cycles mean assets tend to bounce back after a period of poor performance and vice versa.

While SMSFs are seeking lower-risk investments, they are inversely also chasing returns. Therefore they should allocate some of their portfolio towards investment themes that have underperformed the market cycle as they will most likely revert. The key benefit of investing with a robo-adviser is portfolios are automatically rebalanced when the algorithm identifies the portfolio is veering away from its strategy target weights.

It’s important client portfolios still benefit from the best possible diversification benefits. Therefore themes are blended with the core model portfolios. We balance themes within clients’ portfolios so their overall strategy is continually optimised based on their investment goals and risk profile.

We think this is the best way to help clients have a more personalised portfolio and ensure they don’t take on too much risk.

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