SMSF trustees continue to have low exposure to fixed income investments in their portfolios and are still relying on equity markets for income, despite many claiming they were focused on building and protecting their income stream in the next 12 months, according to research group Investment Trends.
Investment Trends chief executive Michael Blomfield said research conducted for the “2020 Vanguard/Investment Trends SMSF Investor and Planner Report” found trustees had a poor understanding of how fixed income worked in their portfolio or generated less risky returns than equity investments.
Blomfield said as part of the research, based on 3156 trustee responses to an online survey conducted between February and May, trustees were asked what their main goal would be for the next 12 months, with 26 per cent saying they wanted to build a sustainable income stream and a further 13 per cent indicating they wanted to protect that stream against market falls.
He said these figures increased to 32 per cent and 19 per cent respectively for trustees aged 65 and over, which was where 50 per cent of all funds in the SMSF sector were held, but when asked how they would achieve those goals, close to 70 per cent of trustees said they intended to generate yield from equities and equity products.
“The challenge in the SMSF sector that needs to be thought through is that despite having a strong interest in a sustainable income stream, there is little fixed income exposure,” he said.
“When we talked to trustees about where they will get their primary fixed income exposure, far and away the largest set of answers is hybrid securities, which are equities vehicles, not fixed income products.
“There has been a large group of people using the equities and hybrid market to access fixed income-like returns and that as a strategy needs to be differentiated from real or pure fixed income.”
Fixed income products had very low levels of penetration in the asset allocation and product allocation of SMSF trustees, who still considered blue-chip equities as the main source of income (70 per cent of respondents), followed by exchange-traded funds (30 per cent of respondents), despite recent market volatility, he said.
He said the use of term deposits and bonds remained very low as trustees maintained the view that fixed income offered poor returns.
“What stops trustees from getting fixed income exposure is this notion of poor returns, which is a function of comparing equity markets to fixed, which is not a meaningful comparison when thinking of risk characteristics,” he said.
“This is a view that growth assets outperform in the long term, but that is comparing growth to income, an approach that does not display a proper understanding of the role of fixed income in a portfolio.
“Fixed income is not part of their strategic allocation and the research tells us people are chasing yield, but chasing it by way of equity exposures.”
The low level of understanding around fixed interest was related to the large number of SMSF trustees not using a financial adviser and not receiving an explanation and education on why they should use different asset classes for different purposes, he said.
