Many SMSFs may be exposed to a much higher degree of risk with their direct share portfolios than their trustees realise.
Research* by Investment Trends shows that SMSFs when surveyed in April held 41 per cent of their overall assets in direct shares with more than half of this invested in financial/banking and resource stocks.
No doubt banking stocks, for instance, with their high fully-franked yields may have provided some comfort to SMSF trustees concerned by market volatility and extremely low interest rates.
It is somewhat ironic that efforts by SMSFs to gain some kind of shelter given their concerns about financial markets and low interest rates may have contributed to their portfolios becoming so reliant on just two sharemarket sectors.
Another clear illustration of SMSF trustees seeking shelter from the prevailing financial markets yet with potentially unexpected consequences is the build-up of so-called "excess cash" in their portfolios.
Excess cash is money that would usually be invested elsewhere when investors recognise other investment opportunities. This extra cash tends to build up during times of increased market volatility and increased concern about financial markets.
When Investment Trends surveyed SMSF trustees in April, 35 per cent of the cash holdings of SMSFs were considered "excess cash" – up from 30 per cent 12 months earlier. In dollar terms, this had amounted to $56 billion in excess cash.
Among the issues arising from a high percentage of excess cash include the question of whether more of the money should be working harder in an appropriately-diversified portfolio to build members’ retirement savings.
The risk of eventually outliving retirement savings, in other words, longevity risk, should never be overlooked when making short-term investment decisions including about how much to hold in excess cash.
A straightforward strategy for investors, including SMSFs, is to ensure that their risks and opportunities are spread across asset sectors by setting an appropriate target or strategic asset allocation for their portfolios.
Keep in mind that seeking shelter can sometimes have unexpected consequences for investors.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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