SMSF trustees turn to risk in low-yield environment

Forty per cent also believe they must invest outside of cash to generate a steady income stream, a concern that remains top of mind for SMSFs.

“Many SMSFs have traditionally relied on the yield generated from their investments to provide income during retirement. Unfortunately, with interest rates expected to remain low for the next year at least, cash investments are unlikely to produce the desired level of income,” Balaji Gopal, head of personal investor at Vanguard Australia, said.

“Instead, SMSFs are looking to invest more in equities or income-yielding assets like property to make up for the shortfall”. 

SMSFs’ appetite for growth-oriented investments is also returning because of their increasing optimism that markets will experience steady growth as economies recover from the pandemic, according to the report.

More than 60 per cent of trustees surveyed said they had a positive outlook on Australian shares, and almost 50 per cent said they had a positive outlook on international shares.

This bullish sentiment is also reflected in SMSFs’ increased dividend yield expectations for the next 12 months, with their dividend yield expectations recovering to pre-pandemic levels (4.2 per cent in April 2021 versus 4.3 per cent in April 2019, on average). 

Additionally, SMSFs pursuing portfolio growth are also more willing to invest in ETFs and small cap and speculative shares in 2021 than they were in 2020.

Mr Gopal noted the shift in asset allocation to a more aggressive stance is understandable given current market conditions, but SMSFs must consider their risk tolerance and remember the role that defensive assets, like bonds, play in a diversified portfolio before significantly altering their investments.

“Recent Vanguard research showed that investors would have to be 100 per cent allocated to equities to produce the dividends needed to support most income requirements,” Mr Gopal said.

“This significantly elevates an SMSF’s portfolio risk — buoyed up even higher if they’re invested in speculative shares that can experience large price fluctuations.

“An alternative investment strategy suited to low-yield environments is a total returns approach, where investors utilise both income and capital growth elements of their portfolio to support their spending needs.”

Strong appetite for ESG investing                 

SMSFs are eager to increase their allocation to ESG investments if it generates positive returns, but there exist several barriers to ESG adoption. 

The report found that SMSFs’ uptake of ESG products is predominantly determined by whether or not they believe ESG investment can deliver comparable returns to incumbent products.

While the majority (54 per cent) of SMSFs surveyed believe returns from ESG investments will be similar to non-ESG investments, 22 per cent believe returns will be worse.

Almost half of SMSFs would only consider ESG investments if they offered better returns, while 39 per cent of trustees are not willing to accept potential lower returns even if the fund generates a positive social or environmental outcome.

There is also a lack of awareness among SMSFs of ESG products, with 21 per cent citing lack of knowledge as a barrier to ESG investing, and 18 per cent citing lack of tools and research to identify and compare ESG products as another.

“This year’s survey reveals that while there is certainly an appetite for ESG investments, the industry still has a way to go to improve SMSFs’ awareness and understanding of such products,” Mr Gopal said.

Changing SMSF market and financial advice impact 

Total SMSF assets have rebounded to an all-time high of $787 billion in March 2021 following COVID-induced losses last year ($694 billion in March 2020), with the total number of SMSFs also continuing to grow, with some 597,000 SMSFs established as of March 2021, despite the annual rate of establishment at decade lows.

SMSF trustees are also getting younger, with the average age falling from 48 to 46 years old.

Robin Bowerman, head of corporate affairs at Vanguard Australia, said SMSFs are now no longer just the realm of older investors. 

“Younger investors are now setting up SMSFs with smaller account balances and appreciating more the investment control and return opportunities that SMSFs can offer,” Mr Bowerman said.

“However, 44 per cent of potential SMSF trustees still intend to keep their APRA-regulated super fund, as contributions are still paid into this account and as a back-up in case they change their mind.”

Meanwhile, with COVID uncertainty igniting a significant shift in SMSF attitudes towards financial advice, more trustees are also willing to seek professional advice than they did before the pandemic.

This, however, has not translated into increased adoption of advice, as the number of SMSFs using financial planners continues to slide.

Positively, overall satisfaction with financial planners has increased slightly since last year from a composite score of 69 per cent to 71 per cent, particularly when it comes to tax advice or technical expertise.

“Opportunities remain for advisers to demonstrate the value they can offer SMSFs, especially in areas such as SMSF pension and contribution strategies, as well as estate planning where there exists an advice gap,” Mr Bowerman said.