ETFs, Investments, Portfolio Construction

SMSF asset allocations riskier now

The preference of SMSF members to favour conservative asset allocations in conjunction with purchasing shares delivering high yield currently involves increased levels of risk due to some significant recent market events, according to an investment manager.

Fidante Partners investment specialist Sam Morris told selfmanagedsuper SMSFs have large allocations to cash and term deposits, but also heavy allocations to high dividend-paying Australian stocks.

“I think the risks of that have re-emerged recently,” Morris said.

“We’ve seen for instance Telstra cutting its dividend over a year ago and that caused a massive rewriting of the stock price. We’ve seen the banking sector impacted by the royal commission. So I guess trustees should be aware that having those concentrated exposures can be risky.”

Fidante said it believes SMSF investors should be interested in actively managed fixed income exchange traded-funds (ETF) as they will allow the implementation of sophisticated risk management strategies to control interest rate risk and will enable higher returns to be generated through actively managing the asset class.

“A lot of passive ETFs have got a lot more interest rate risk than they used to have because of the way those benchmarks are constructed so that the debt in those benchmarks is becoming longer in duration,” Morris noted.

“The amount of exposure to rising interest rates has increased in those benchmarks.”

Fidante Partners last year launched its ActiveX offering, which comprises a series of actively managed ETFs run by various boutique fund managers.

The ActiveX Ardea Real Outcome Bond Fund, or XARO, is expected to attract significant interest from SMSF members while also appealing to other retail investors, stockbrokers and advisers.

Morris said the firm is targeting SMSFs for its active fixed income ETF as trustees are heavily overweight cash and equities.

However, he admitted there is no data that points to significant historical flows into actively managed ETFs because the products have been unavailable in Australia.

The underlying unit trust XARO invests in has just over $500 million, with much of the growth generated in the past 18 months from retail clients.

The unit trust the ETF invests in has generated 3.6 per cent a year after fees, while it has generated 4.5 per cent after fees over the past three years.

Morris said Fidante is looking to launch active ETFs in the global equities and Australian equities space this year, particularly in strategies that can generate income that exceeds market levels.

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