SMSFs need to seek new investments or accept possibility of ‘humble retirement’

Historically, SMSFs gravitate towards either cash and term deposits or listed Australian shares and ignore other asset classes, according to Mr Swallow.

“In our view, the Australian share market might be close to full valuation and continues to be susceptible to pandemic and geopolitical risks. Most SMSF portfolios might be seeking alternatives to equities risk,” he said.

“With interest rates close to zero, cash and term deposits might be limited in compensating for potential losses in listed Australian shares.”

Mr Swallow noted that uncorrelated investments could be crucial for SMSFs looking to spread the investment as it can improve their portfolio returns by investing part of their portfolios in assets that are uncorrelated with the rest of the portfolio. An uncorrelated asset is one that responds differently to market forces compared to the rest of the portfolio.

“For an SMSF, an uncorrelated asset would generate returns in its own way and does not react to the market forces impacting on, say, Australian equities. Traditionally, this role has been played by instruments such as bonds,” he noted.

“However, bonds have been shown to be more correlated with equities over short periods, especially where interest rates are at record lows. Moreover, investors in longer-dated bonds might also be subject to capital losses should interest rates rise.”

Life settlements are non-correlated to markets

One candidate for the uncorrelated asset might be life settlements as the life settlement asset is structurally non-correlated to the share market, the bond market, or property price movements, according to Mr Swallow. 

“A well-managed exposure to life settlements can provide potential returns comparable to that of equities over longer time periods, but with less volatility and with no correlation to equities or other investible assets,” he explained.

To obtain exposure, SMSFs can consider investing in life settlement funds which invest in resold life insurance policies in the United States. Mr Swallow noted the asset class has been gaining attention worldwide as investors seek uncorrelated returns in a low-interest rate environment.

“The result is an investment that has no correlation with or dependence upon the usual crisis triggers – declines in share prices, interest rate hikes, economic instability, or geopolitical surprises.”