SMSFs still lack diversification

SMSF diversification

SMSF trustees’ preference for investing in direct shares is continuing to present diversification issues in their fund portfolios.

Research into the investment behaviour of SMSF members has revealed a lack of true diversification within their fund portfolios continues to be an issue.

The “Vanguard/Investment Trends SMSF Report” for 2022 showed SMSFs had an approximate portfolio allocation of 36 per cent to direct shares in 2022. This was consistent with the survey result in 2021.

However, when examining the direct share holdings of SMSFs in more depth, the study indicated the median number of stocks trustees aged 44 and under held was seven, for trustees between the ages of 45 and 54 it was 13, in the age group covering 55 to 64 it was 14 and for those members aged 65 and over it was 19.

Vanguard Australia head of corporate affairs Robin Bowerman noted this has been a characteristic of SMSF portfolio construction for more than a decade.

“That lines up with what [we’ve seen] over the journey of 10 to 12 years of doing this research. The number of direct shares SMSFs own has typically been around that 15 to 17 mark. It’s pretty constant,” Bowerman acknowledged.

“And you don’t need to be Einstein to work out a lot of it’s bank shares [with trustees] looking for dividends, [so] it’s an income-tilted environment.

“And I think while 15 to 19 shares is a good direct share portfolio, a diversified portfolio it probably is not in terms of the concentration within big mining companies and big banks.”

According to Bowerman, this behavioural aspect is unlikely to change, but the diversification issue is being mitigated through the use of other investment products like exchange-traded funds (ETF).

“[If] they add the ETFs in, it gives them a huge amount of diversification, particularly [with] international shares, as it becomes a bit of a core/satellite investment approach,” he noted.

The survey indicated ETFs accounted for 5 per cent of SMSF portfolios in both 2021 and 2022.

The survey for the “Vanguard/Investment Trends SMSF Report” for 2022 was conducted online between March and April and compiled and analysed responses from 2430 SMSFs.

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