Absolute return under-represented in SMSFs

Absolute return-style investing accounts for only $40 billion of the almost $700 billion sitting in SMSFs, which can be attributed to the large minimum investment size prerequisite, according to Arco Investment Management.

Arco executive director Jason Huddy told a media briefing in Sydney today that while many Arco clients are SMSFs that invest in the absolute return style, this did not reflect the broader investment market.

“There’s a reasonably broad universe for what we do for a narrow shallow pool,” Huddy said, adding SMSFs seek insurance in absolute return investing during market volatility.

He also noted SMSFs traditionally invest in banks, resources, retail and term deposits, which account for 30 per cent.

Arco chairman Bruce Loveday said the investment manager has been able to attract SMSF clients after making the strategy available for an investment minimum of $25,000, instead of $500,000, in the past 12 months.

“Now, $500,000 in the context of an SMSF, if you assume that say the average that people might talk about in allocation to alternatives is about 10 per cent, so $500,000 in a fund like Arco you’re really talking about a $5 million SMSF, of which there are very few,” Loveday said.

The strategy is now available with a product disclosure statement instead of an information memorandum and it is now priced on a daily basis, allowing investors to enter and exit the strategy if they wish.

With a little over half of SMSFs in pension mode, Loveday pointed out clients in the 65 to 75 age cohort will have to withdraw a minimum pension of 5 per cent, which is the equivalent of having a negative return of 5 per cent in the portfolio that the client must overcome before seeing any growth in the portfolio.

“If you’ve got relative benchmark managers who are happy to come across a time when the All Ordinaries Index or some other index goes down, which actually does happen from time to time … maybe you’re in an environment where the risks of that happening are enhanced, then you can finish up in a really bad spot purely and simply by not focusing on generating absolute returns out of funds rather than relative returns,” he said.

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