Conventional superannuation funds did better recovering from the pandemic-induced slump than personal funds, new research from giant fund manager Vanguard and researcher Investment Trends has shown.
According to Vanguard’s figures, both the total value of APRA-regulated super funds and self-managed super funds fell in value by 10 per cent in the months when the crisis hit early last year.
But APRA-regulated funds rose 15 per cent from the market nadir of the slump to March 31 this year.
The value of total assets held by SMSF recovered only 13 per cent, Vanguard found.
That was despite the fact that conventional pooled funds paid out $36.4 billion in emergency payments to members who said they had been put in financially difficult times when the country went into recession.
There are two major reasons why SMSFs performed more poorly than their pooled competitors. Partly it was due to the makeup of their investment portfolios and partly to the actions of their owners.
Restricted by size
“SMSFs have, broadly speaking, a restricted exposure to different markets,” said David Knox, partner with superannuation consultancy Mercer.
“They are fairly heavily invested in Australian equities rather than international equities.”
That distinction made a major difference in recovery from the crash because there has been stronger growth in the international markets in recent times.
“Australian equities have returned 28.5 per cent with dividends reinvested,” said Mano Mohankumar, lead researcher with Chant West.
“For international shares hedged against currency movements, the return was 37.1 per cent,” Mr Mohankumar said.
According to ATO figures in the year to March 31, SMSFs had $216.46 billion invested in Australian shares and only $9.13 billion, or 1.2 per cent of their total portfolios, in international shares.
The contrast with pooled funds is stark. They had, on average, 27 per cent of their portfolios in international shares. For the standard default or My Super product the figure was 28.4 per cent, according to Chant West.
Because most SMSFs are relatively small compared to pooled funds they can’t get access assets like private equity and unlisted infrastructure.
However, some of the managed-fund holdings listed above would be in listed infrastructure funds to try to replicate pooled-fund portfolios.
Because those managed fund holdings are generally listed they move with share markets and don’t give SMSFs the same stability unlisted products deliver pooled funds.
Another factor limiting SMSF investment is familiarity.
“Generally speaking, with SMSFs people tend to invest in products they know, like Australian equities or term deposits,” Mr Knox said. “While Aussie stocks have done all right that isn’t the case with term deposits because interest rates are now so low.”
“Years ago SMSFs outperformed a little bit because they had more money in term deposits and interest rates were high. But not now,” Mr Knox said.
SMSFs are increasingly used to buy investment property using non-recourse loans which have some observers worried they are helping push up home prices. That gives them almost double the property exposure as pooled funds.
SMSF owners took action to reduce their share holdings when the pandemic rocked markets and may be paying a price for that now.
That is because a move into cash at market lows locks investors out of rising share prices.
As the above chart from Vanguard shows, in March 2020 SMSFs had 27 per cent of their assets in cash and similar products like term deposits but by March this year the figure had fallen to 21 per cent.
“Some of that was due to the market bouncing back [making cash holdings relatively lower] but some is people moving their holdings,” Mr Knox said.
“What we saw in the year 2019-20 certainly was a move away from equities and towards cash,” said Irene Guiamatsia, head of research at Investment Trends which authored the paper with Vanguard.
“But in the last 12 months there has been a 180 degree turn from that position.”
That move is set to continue. “If you look at the 12 months going forward SMSF trustees say they have concerns about income streams generated from pension products [as many are retired],” Ms Guiamatsia said.
“So they look to equities, and one of the features they look for in equities are high dividend streams.”
The research paper, entitled the Vanguard/Investment Trends
2021 SMSF Investor Report found that 45 per cent of SMSF owners had made significant asset allocation changes in 2020, including 30 per cent who had moved between 20 and 50 per cent of their holdings.
There could also be a sea change going on among SMSF owners regarding where they invest. “Something interesting is happening in that the move back to equities is not just domestic,” Ms Guiamatsia said. “They are starting to look seriously at international equities.”
“Everyone has seen what the US equity market has done in the past year and that is generating interest,” she said.
SMSFs account for 25 per cent of all superannuation money, or $754 billion, but only have 1.12 members.There are 23 million accounts in the pooled sector.
The SMSF average balance is $673,000 compared to the average male balance across the pooled system of $168,000 and $121,000 for women.
Nine newspapers reported that the largest SMSF is worth $544 million in 2019 and the top 100 such funds had assets totaling $9.64 billion.
The median balanced-pooled fund returned between 17.1 per cent and 18 per cent in the June year, according to research houses Chant West and Rainmaker.
The New Daily is owned by Industry Super Holdings.