SMSF trustees must not simply chase yield as they may be subjecting their portfolios to unnecessary risks, according to AMP Capital.
Instead, it was essential to continually monitor and reassess a fund’s assets and determine whether it has the right mix to meet members’ income requirements without taking on more risk than needed, the investment manager said.
“When thinking about how to retire comfortably, about a third of SMSF trustees say their top goal is building a sustainable income stream, however, chasing this very strategy can cause them to take on too much risk,” it said.
“The decision an SMSF trustee makes should depend on their own personal retirement goals.
“By simply chasing yield, you may be subjecting your portfolio to unnecessary risk.
“Regularly review your strategy to ensure it remains relevant for the current market conditions.”
According to AMP Capital, SMSF trustees’ relentless hunt for yield over the past five years has resulted in valuations becoming increasingly expensive and income levels falling, particularly from the “risk-free” parts of the market, which become expensive and underperform.
“That means simply chasing yield can be a trap,” it said.
“You may end up taking on more risk than you’re comfortable with for an income that isn’t suitable.
“That’s why it’s more important than ever to really understand the source and sustainability of your portfolio’s income and to diversify across different income-producing asset classes, but not at any price.”
Further, each SMSF investor will have their own “right” balance of income-producing investments, it pointed out.
Once trustees are clear about their income strategy, they can then start to find the right assets that meet that criteria.
When it came to shares, AMP Capital said rather than simply focusing on yield, SMSF trustees should consider the total benefits the stock may bring to the portfolio.
“For example, the tax-effectiveness of franking credits are very attractive to income-seeking SMSF investors,” it said.
“With that in mind, consider searching for companies that have the potential to conduct off-market buy-backs in the near future.”
Commenting on bonds, AMP Capital said in its view bonds will remain on hold until at least 2020 in Australia.
“The message here is to do your research on market conditions on a regular basis,” it warned.
“SMSF trustees generally access the bond market by investing in managed funds, so be mindful of fees and risks.
“Like bonds, investors generally access infrastructure assets by investing in managed funds – it’s important for investors in global infrastructure investments to take into account any effect the currency may have on the assets’ return, and there will be a small cost associated with hedging away currency risk by investing in a hedged managed fund, for example, which may also impact potential returns.”
Trustees must also keep in mind the considerations for property, that is, the right split of commercial property and residential real estate assets in their fund, how this balances with their assets outside of super, as well as whether to get exposure through listed or unlisted vehicles, it said.
