Instreet Investment managing director George Lucas shares his views on the importance of portfolio construction for SMSF trustees.
What parts of investment advice do trustees value most?
In my opinion, there is an increasing number of trustees who are valuing strategic advice as compared to product or stock picking. There are several reasons for this, but I think the prime factor is that coming out of the GFC there was reassessment by trustees of their investment priorities: in short, it went from the next 'hot thing' to capital preservation and income generation. Remember, too, that about 55 per cent of trustees are in the pension phase. They want strategic advice about how to preserve their capital for the long term, not how to pick winners.
Where are advisers going wrong with the investment advice that they’re giving?
Well, I actually think that advisers get it right in that they sit down with their clients and determine their long-term goals and devise a strategy to dovetail with those goals. In a sense it’s the other side of the coin to the answer I gave before: trustees (especially in pension phase) want strategic advice around capital preservation and income generation, and advisers have rightly responded to this market demand.
What kind of needs do SMSF trustees have that are different from other advice clients?
How can an adviser service those needs? There are quite complex and demanding regulations governing the SMSF sector and trustees either have to be cognisant of them or be prepared to get the right professional advice to ensure they are compliant. Because it is superannuation money, the regulations are far more onerous than for those who are investing outside superannuation. For those who step over the line, the penalties can be quite taxing – if you will excuse a bad pun.
Are SMSFs overweight in property? Is it a concern?
The short and correct answer is no, so logically it’s not a concern. You only have to look at the last set of figures from the Australian Taxation Office about SMSF asset allocation to realise this story (largely based around residential property) has been overplayed in the media. In the 12 months to 31 March 2014, the ATO statistics show that investment in residential property rose 17.2 per cent to $20.5 billion. That’s the headline figure. But $20.5 billion still only represents 3.7 per cent of total SMSF assets of $558.5 billion, and it still falls far short of non-residential property assets at $68.4 billion or 12.2 per cent of total assets. The latter figure has been steady for several years. Interestingly, growth has started to fall off in line with some of the heat coming out of the residential property markets, especially in Sydney. And limited recourse borrowing arrangements only stand at $2.76 billion or 0.5 per cent of all SMSF assets. That hardly represents aggressive borrowing.
Where are SMSF portfolios falling short?
I would argue it’s hard to sustain the argument that they are falling short. A recent survey by the National Australia Bank showed that SMSFs outperformed their APRA-regulated cousins over eight of the past 10 years. It’s well known they are heavily weighted towards Australian blue chips (especially those offering franking credits), but given the tax incentives to do so it would be more surprising if they didn’t. The heavy cash component (28 per cent at 31 March 2014) reflects a conservative bias and the need for liquidity. Remember, again, many are in pension phase. That said it would be good if they started to diversify, but it’s not that simple. Assets such as infrastructure and bonds can be logistically difficult for the retail investor (investment size, lack of liquidity), but hopefully the Financial System Inquiry might find ways to ease SMSF trustee entry into these asset classes.
What do you see as the most pressing issues facing the SMSF sector?
I think there are three critical issues confronting trustees. First, they need education to understand their responsibility and the need to get advice as the rules are complex. Second, and while I understand the thinking behind it, the large cash holdings suggest there is a need for a review of investment strategies, especially if trustees are in the accumulation phase. Third, and linked to my second point, the financial system has to find a way to allow SMSFs to participate in asset classes such as infrastructure and private equity. It's worth remembering that one of the reasons superannuation was established was to invest in the development of Australia. David Murray, over to you.
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