SMSF: Are you over weighted in cash?

During the Global Financial Crisis, many investors experienced poor returns from managed funds (including superannuation funds) and a depreciation in the value of their listed equity portfolios. Together with the collapse of major global financial institutions, investor trust in the institutional financial services sector has been damaged.

Since then, and largely as a result of that damaged trust, investor behaviour has changed significantly in Australia. In particular:
1. Control — Australian investors are now demanding more control and flexibility over their investment decisions. Investors want to make their own choices about what allocations to make into each asset class, and within each asset class which particular assets to buy or sell.
2. Relationships — Personal relationships with wealth advisers and financial planners have become less important, especially where those relationships did not demonstrably protect portfolio balances during the GFC.
3. Mobile — Investors have become much more comfortable using remote investment channels (such as online investment platforms) to make their investment decisions quickly and efficiently, and without paying additional fees.

One of the results of those trends has been the incredible growth of self-managed superannuation funds.

In fact since June 2009 the value of assets held by SMSFs has grown from approx. $320 billion to $543 billion at June last year. This is a massive increase and a trend we expect to continue at least in the short term.

However, a closer inspection of the way that capital is being allocated across the asset classes reveals a concern. Just over 29% of the $543 billion held by SMSFs is being held in cash and cash equivalents. With interest rates at record lows, and no reason to expect them to increase materially in the near future, Australian SMSF funds are arguably overweighted in cash.

So whilst investors have sought to take back control of their investment decisions by establishing their own SMSFs, we now have a situation where 29.1% of the SMSF asset pool is earning very little real return due to its allocation into cash and cash equivalents.

Investors who manage their own SMSFs should take a little time out early this year to re-assess their asset allocation strategies and talk to a financial adviser about whether their current asset mix is properly diversified to achieve their financial objectives.


Guest Author: Steven Maarbani, Partner — PwC Venture Capital & Private Equity