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Crisis? What crisis? Despite a year of volatile share prices, SMSFs held their course in the year to June 2020. They continue to invest heavily in Australian blue chip shares, which offer a degree of safety along with the potential for capital gain and dividend income.
These companies are household names Australians have grown up with – think the big four banks, BHP Billiton, Telstra, Coles, and Woolworths. They offer investors an opportunity to buy shares directly in companies they believe will deliver long term returns.
Buying shares directly also allows individual investors to build their own diversified portfolio across a range of industries according to their own needs for long-term growth, create a sustainable income stream from dividends and reap the tax advantages of dividend franking credits.
Australian shares are the most popular investments among SMSFs, with almost 60% of funds holding them. This compares with less than 3% of funds holding direct international shares and 17% with traditional managed funds. ETFs are also rapidly gaining acceptance, with more than 15% of SMSFs now holding them.
Of course, picking shares and monitoring them takes time and effort but it does have the potential to grow wealth in the long run. And, because all earnings on investments in your super fund must be preserved until you retire or reach another condition of release, capital gains and dividend income must be reinvested within your fund where they compound over time.
According to BGL data, as of 30 June 2020 direct investment by SMSFs in domestic listed securities is heavily concentrated in blue chip stocks which tend to mirror the ASX top 20 listed companies.
The top 20 list below is ranked by the percentage of SMSFs that hold these shares, rather than the value of assets that all SMSFs have invested in those shares, although both figures are provided in the table.
20 most popular Australian shares invested in by SMSFs.
| Rank | Security code | Company | % of Funds with Domestic Listed Securities that hold this security | % of total SMSF Domestic Listed Securities Investments* |
|---|---|---|---|---|
| 1 | WBC | Westpac | 48.3% | 4.9% |
| 2 | NAB | NAB | 47.4% | 4.9% |
| 3 | CBA | CBA | 44.6% | 8.4% |
| 4 | BHP | BHP | 44.4% | 5.3% |
| 5 | ANZ | ANZ | 43.6% | 4.0% |
| 6 | TLS | Telstra | 43.4% | 3.3% |
| 7 | WES | Wesfarmers | 33.8% | 3.6% |
| 8 | WPL | Woodside Petroleum | 29.2% | 1.6% |
| 9 | COL | Coles | 23.1% | 1.0% |
| 10 | WOW | Woolworths | 22.4% | 2.2% |
| 11 | CSL | CSL | 18.6% | 5.1% |
| 12 | MQG | Macquarie Group | 17.9% | 2.4% |
| 13 | RIO | RIO Tinto | 16.9% | 1.9% |
| 14 | S32 | South32 | 15.7% | 0.3% |
| 15 | TCL | Transurban | 14.1% | 1.4% |
| 16 | AGL | AGL Energy | 11.9% | 0.7% |
| 17 | SYD | Sydney Airport | 11.7% | 0.6% |
| 18 | SUN | Suncorp Group | 11.6% | 0.6% |
| 19 | SHL | Sonic Healthcare | 10.6% | 0.8% |
| 20 | ORG | Origin Energy | 10.1% | 0.4% |
Source: BGL (bglcorp.com.au). Data as of 30 June 2020
As you can see, direct investment by SMSFs is concentrated in the big four banks which take out four of the top six spots, with Macquarie Group also remaining in the top 20. Heavyweights BHP and Telstra round out the top six.
Despite the COVID-linked market tremors in the first half of 2020, and the previous fallout from the Banking Royal Commission, SMSFs have barely changed their bank holdings.
Ever since the GFC, the big banks have been prized for their reliable income stream and high dividend yields at time of falling interest rates. While bank dividends may still be better than the near zero interest rates on offer from term deposits, it can no longer be taken for granted that the banks will provide the growth and income investors have come to expect and depend on.
In 2020, the big four banks and Macquarie have all either deferred or cut dividends, against a backdrop of falling earnings due to the recession and COVID. It remains to be seen if SMSF investors will begin to spread their net more widely by seeking out more diverse sources of yield and/or ASX stocks with higher growth potential.
After cutting the cash rate and the target rate for three year government bonds to 0.1% in November 2020, the Reserve Bank indicated that it would not consider lifting rates for at least three years. It’s also likely that the banks could face further downward pressure on earnings in 2021 when Government income support measures are phased out and borrowers who deferred loan repayments due to COVID come under pressure to resume payments.
That said, the dividend yields from Australian shares, although reduced, is still far better than yields from bank deposits and other popular asset classes.
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