SMSFs missing out on global diversification
SMSFs are underexposed to global equities and consequently miss out on currency, diversification and capital growth benefits, according to PM Capital.
PM Capital Australian equities portfolio manager Uday Cheruvu said global equities are underepresented in SMSFs, with only around one per cent of all SMSF assets invested in the asset class.
As a result, Mr Cheruvu said, SMSF trustees are missing out on considerable growth opportunities. International equities have outperformed Australian equities on a six-month, one-year and three-year basis and are likely to continue this outperformance.
“Until we see growth return in China it’s unlikely that the Aussie market will have [a] strong performance, which is what is reflected in the past four months,” he said.
“To see growth in China you need to see global growth and if global growth happens global equities will perform better – from that perspective I expect global equities to outperform.”
Mr Cheruvu said SMSF trustees are also failing to benefit from the diversification offered by global equities and the decline of the Australian dollar.
“The Aussie dollar is still at US$0.85, substantially higher than its historical average of US$0.50 and in terms of the types of companies you can buy there’s no equivalent to companies like Google in Australia,” he said.
“If you want to invest in companies that have a higher growth potential over a longer period of time, it’s harder to get that in Australia.”
Mr Cheruvu said although investing in global equities may mean missing out on franking credits and a slightly higher dividend yield, the capital growth of international equities tends to be higher.
“The total yield, net yield income plus growth, is higher,” he said.
While the SMSF trustee bias toward home equities is changing, it is happening at a very slow pace, he added.
Investment Trends senior analyst Recep Pecker also agrees that a low exposure to global assets could be affecting the growth potential of SMSFs.
“When you compare the size of the SMSF industry to retail and industry [super] funds, what you’ll find is, for example, in the past year the retail and industry funds grew quicker than SMSFs,” said Mr Pecker.
“One of the reasons behind this has been SMSFs’ underexposure to international [assets]."
Mr Pecker said a lack of knowledge of overseas markets and the difficulties associated with directly investing in overseas shares could contribute to the reluctance to invest in global assets.
These reasons, Mr Pecker said, could explain why exchange-traded funds and managed funds tend to be popular options for SMSF trustees looking to access global markets.