SMSF investment: Three most popular asset classes, and the rest

Note: We regularly update this article with the latest data on self-managed superannuation funds (SMSFs) released by the Australian Taxation Office. This article contains the latest data available up to March 2013 (for data as at December 2012).

Each quarter the ATO releases self-managed super fund statistics derived from annual return data. Some of the more interesting data outlines the investments that SMSF trustees choose, and how much SMSF money is invested in the different asset types.

We have been publishing this information since we started SuperGuide 4 years ago, and I have always been amazed that this information is not more widely disseminated by other media, and by the superannuation industry. Around half a million SMSFs (496,028) run by nearly 1 million trustees (945,207) control $474 billion in assets (as at December 2012). A more impressive statistic is that SMSF trustees control around a third (31.5%) of all superannuation money held by Australians. Ten years ago, SMSFs controlled only 10% of all superannuation money.

A fascinating aspect of this growth in SMSFs is that the investment behaviour of the 945,000-plus SMSF trustees is capable of influencing investment markets. A relatively recent example is the uproar over the Cooper Review recommending the banning of investment in artwork and other collectibles. The immediate activism of the art world and the coin industry, which successfully killed the Cooper recommendation to ban collectibles in SMSFs (although much stricter storage requirements have been introduced) highlights the importance of the SMSF money to many investment markets in Australia.

More recently, the property market, or more precisely, the professionals in the property market are becoming particularly enamoured with SMSFs, due to relaxed borrowing rules (introduced in 2007) and to the ever-growing SMSF fund balances, now averaging $968,000 as at December 2012.

Three most popular investment classes

Year in year out the three most popular investment classes for SMSF trustees are: direct shares, cash and direct property.

In 2004, these three asset categories represented two-thirds (66%) of all SMSF investments. As at June 2011, the three asset categories – Australian shares, cash and direct property – represented a massive 75% of all SMSF investments.

As at December 2012, again the three main asset categories represented a 75% of all SMSF assets. SMSFs held 31.6% of fund assets in direct Australian shares, 28.6% in cash and term deposits, and 15% in direct property. In the past 6 months, SMSF investment in shares has increased slightly, while cash holdings have dropped by a similar amount – around 2%.

Of the remaining 24.8% of the $474 billion in total SMSF assets, 13.3% was held in trusts (9.1% in unlisted trusts and 4.2% in listed trusts), 4.7% in ‘other managed investments’ and the remaining 6.8% spread across 12 other categories.

Eight years earlier, as at June 2004, SMSFs held 31% of fund assets in direct Australian shares, 23% in cash and term deposits (and debt securities), and 12% in direct property. Of the remaining 34% of the $127 billion in total fund assets, 21% was held in trusts (10.5% in public trusts and 10.5% in other trusts), 6% in managed funds, and the remaining 7% spread across six other categories.

The table below outlines the gross asset allocations across all SMSFs.

*In June 2004, different classifications applied to the SMSF statistics. The writer has allocated the 2004 assets to the closest definition used today. For the specific classifications in place in June 2004 refer to the June 2012 ATO SMSF statistical report

Source: Adapted and updated from ATO tables in the link above, and previous ATO statistics (www.ato.gov.au). Writer has included percentages and collated data to create a comparison table. In some cases the total percentage for each timeframe is slightly over or slightly above 100%, due to rounding.

Does the asset allocation change for larger (or smaller) SMSFs?

The ATO also publishes statistics listing the asset allocations for different fund sizes. The latest data is as at June 2011 for specific fund size asset allocation. I compare the 2011 data (extracted July 2012) on allocations for the same fund size as at June 2004. The investment breakdown for four different fund sizes is set out below:

• Fund balance (at least $150,000 and up to $200,000). In 2011, SMSFs of this size held 31% of fund assets in direct Australian shares, 40% in cash and term deposits, and 6% in direct property. Of the remaining 23% of assets, 10% was held in trusts (6% in unlisted trusts and 4% in listed trusts), 4.5% in ‘other managed investments’ and the remaining 8.5% spread across 12 other categories. In 2004, SMSFs of this size held 31% in direct Australian shares, 30% in cash, term deposits and debt securities and 10% in direct property. In 2011, there is a greater weighting to cash but this may not be a permanent trend: this could simply be a product of poor-performing share markets and the after-effects of the GFC on portfolios. The weighting to direct property for this fund size has dropped by nearly half over the past six years, which could simply be a consequence of a hike in property prices meaning that SMSFs holding property will also have higher fund balances due to asset revaluations.
• Fund balance (at least $200,000 and up to $500,000). In 2011, SMSFs of this size held 31% in direct Australian shares, 34% in cash and term deposits and 11.5% in direct property. Of the remaining 23.5% of assets, 12% was held in trusts (7% in unlisted trusts and 5% in listed trusts), 5% in ‘other managed investments’ and the remaining 6.5% spread across 12 other categories. In 2004, SMSFs of this size held 30% in direct Australian shares, 25% in cash, term deposits and debt securities and 12% in direct property. Percentage of property holdings have remained constant over the 7 years.  In 2011, again there is a greater weighting to cash.
• Fund balance (at least $500,000 and up to $1 million). In 2011, SMSFs of this size held 32% in direct Australian shares, 31% in cash and term deposits and 14% in direct property. Of the remaining 23% of assets, 12% was held in trusts (7% in unlisted trusts and 5% in listed trusts), 5% in ‘other managed investments’ and the remaining 6% spread across 12 other categories. In 2004, SMSFs of this size held 31% in direct Australian shares, 22% in cash, term deposits and debt securities and 12% in direct property. In 2011, again there is a greater weighting to cash.
• Fund balance (at least $1 million and up to $2 million). In 2011, SMSFs of this size held 32% in direct Australian shares, 30% in cash and term deposits and 15% in direct property. Of the remaining 23% of assets, 12% was held in trusts (8% in unlisted trusts and 4% in listed trusts) and 5% in ‘other managed investments’. The remaining 6% was spread across 12 other categories. In 2004, SMSFs of this size held 32% in direct Australian shares, 21% in cash, debt securities and term deposits, 13% in direct property and a 22% weighting to trusts. In 2011, there is a greater weighting to cash and a drop in the money allocated to trusts, compared to 2004.

Note: The overall observation that I can make from these statistics is that over time, and regardless of fund size, the investment behaviour of SMSFs is spookily similar when looking at total assets invested via the sector, and when looking at different fund sizes. For example:

• For SMSFs valued at between $150,000 and $2 million, invariably, around three-quarters (75%) of SMSF money is invested in three asset classes (direct Australian shares, cash and direct property).
• Based on overall statistics, all SMSFs, on average, invest around 75% of SMSF money in the three main asset classes. On average, around a third of SMSF assets are invested in direct Australian shares, a third is held in cash and term deposits, and between 10 to 15% held in direct property.

Examining very small and very large SMSFs

When examining the very small SMSFs and the very large SMSFs, however, you can notice some clear differences. The smaller SMSFs have a much greater weighting to cash hinting at inactive funds. For example, the SMSFs with balances of less than $50,000 hold more than half (57%) in cash, and the SMSFs with balances of less than $100,000 (but more than $50,000) hold 48% of fund assets in cash. In contrast, SMSFS with more than $5 million in assets hold between 19% and 24% in cash, the lowest allocation of cash for all fund sizes.

The smallest SMSFs (less than $50,000 fund balance) have the lowest allocation to direct Australian shares.

Based on the statistics, it appears that the very large SMSFs (more than $5 million) have greater diversification across asset classes although still strikingly similar to the overall asset allocation for the sector. In comparison, the smallest SMSFs (less than $100,000) have 76% to 80% of assets in two asset categories – direct Australian shares, and cash and term deposits.