A specialist fund manager has expressed concerns over the continued lack of diversification in SMSF portfolios, as reflected in the latest ATO statistics, stressing current allocations could leave them susceptible to falls in the markets due to equity price corrections.
To this end, Capspace managing director Tim Keith noted the ATO data from the June quarter indicated close to 30 per cent of the total assets held by SMSFs, or $293.9 billion, was invested in domestic or overseas shares.
Adding to the presence of concentration risk for SMSF trustees was the fact $162.4 billion, representing 16.4 per cent of the sector’s total assets, was held in cash or term deposits, while another $157.8 billion, or 16 per cent of the entire investment pool for the space, was in held in property.
“This overreliance on property, shares and cash raises red flags about diversification and risk management for SMSFs,” Keith warned.
As such, he suggested trustees should consider including larger allocations to fixed income investments in their SMSF portfolios.
“A balanced portfolio is crucial for long-term financial security and fixed income assets offer stability and regular income in the face of economic uncertainty and share market volatility,” he noted.
“However, with just $12.1 billion invested in debt securities and another $6.3 billion in loans, SMSFs are still largely ignoring fixed income investments; these are tiny amounts given that SMSFs have almost a trillion dollars in assets under management.”
He pointed out allocations to fixed income instruments could boost returns trustees can enjoy, especially those in the retirement phase of their lives, given the current interest rates on offer from term deposits, which stand at 4.3 per cent for a duration of one year and 3.8 per cent for a three-year duration.
“In contrast, yields on many private credit funds sit at around 10 per cent per annum and that is especially attractive with falling term deposit interest rates. The Capspace Debt Fund [for example] yielded a return of 9.31 per cent per annum in September with interest paid monthly,” he revealed.
“As investors approach retirement, many are looking for ways to transition to higher-yielding fixed income investments away from cash and residential property, which dominates Australians’ wealth portfolios. One of the key advantages of private credit is the access to regular monthly income at higher yields, which can provide retirees with a steady and reliable cash flow.
“Private credit, or non-bank lending to companies, offers Australian investors an attractive and regular income stream and capital protection through a stringent loan process, and for that reason can offer investors very attractive risk-adjusted returns which smart investors are including in the fixed income portion of their portfolios.”
