SMSFs taking ‘unnecessary risks’ on banks
SMSF investors who are overweight in banking stocks for income generation purposes are taking unnecessary risks in their portfolio and should cash out now before the equities bull market comes to an end, according to an investment adviser.
ASR Wealth head of Australian equity research Tim Montague-Jones told SMSF Adviser that while banks were a logical choice for income investors due to their high dividends, the risk of a coming recession meant their yield prospects were not as stable into the future as other more defensive stocks.
“Banks are not a sensible place to put your money when earnings start coming down and dividends get cut, and people don’t realise how much exposure they have, especially if they have hybrids in their portfolio as well,” Mr Montague-Jones said.
“We prefer to own a 4 per cent yield and give up the 10 per cent yield coming out of the banks because we think the payout ratios are too high. We are looking at sustainability of revenue flow and balance sheets to make sure that companies actually have the cash to keep paying the dividends out.”
Mr Montague said his firm’s income strategy took a more defensive approach, focusing on infrastructure stocks with stable ongoing cash flow through monopoly assets or long-term leases.
“We like the poles and wires of electricity and pipelines — APA Group is a good example; it’s a regulated asset across the east coast that provides transport of gas and electricity across the grid,” he said.
“We also like infrastructure assets like Sydney Airport; it’s a key monopoly asset in that area and it delivers good returns.”
The strategy would soon launch on online broking platform Macrovue, which Mr Montague-Jones said provided a timely opportunity for SMSF investors who were often heavily invested in key blue-chip Australian companies to get comfortable with investing further afield.
“We believe that investors need to be looking at international equities — Australia is a small component of the market and just because we haven’t had a recession for the last 28 years doesn’t mean our market is going to do well over the next 28,” he said.
“Investors need to look at the best companies globally, and the best way to do that is by getting familiar with the Macrovue platform, perhaps starting with the income portfolio, and as they start to feel more comfortable, they can build up a view on where else they want to invest.
“The key is getting people to understand they are taking a large risk by putting all their eggs in one basket which is the banking sector, and with markets at all-time highs, now is the time to take action, sell all the crap in your portfolio and realign your assets to be more prepared.”