Contrary to expectations, not even soaring inflation and rising interest rates could hold Australian shares back in the year to June 2023, with the local market surging 14.4%. That was sure to keep SMSF investors happy, as domestic shares remain their preferred asset class with Class SMSFs holding 28.8% of their assets in Australian listed securities.
The next largest asset class among Class SMSFs is direct property (21.1%) followed by cash and term deposits (15.4%).
The most popular stocks among SMSFs are household names Australians have grown up with – think the big four banks plus Macquarie Bank, mining heavyweights BHP and Woodside Energy, Telstra and the big retailers Wesfarmers, 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.
During a time when interest rates were still at historic lows, the average dividend yield of Australian shares was 4.7% in June 2023, or close to 6% when franking is included. Many of the shares in the top 20 yield significantly more (although it should be remembered that yields fall as share prices rise, and vice versa). For all these reasons, direct holdings in Australian shares are the most popular investments among SMSFs (excluding cash and term deposits), with over 60% of funds holding them. This compares with about 10% of funds holding direct international shares and around 30% with ETFs and traditional managed funds, many of which have underlying investments in local and international shares.
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 Class data, as of 30 June 2023 direct investment by SMSFs in domestic listed securities is heavily concentrated in blue chip stocks that tend to mirror the ASX top 20 listed companies.
The top 20 list below is ranked by popularity (the percentage of SMSFs that hold these shares), rather than the percentage value of assets that all SMSFs have invested in those shares, although both figures are provided in the table.
The 20 most popular Australian shares invested in by SMSFs*
Source: Class. Data as of 30 June 2023
*Data derived from 186,220 SMSFs that use Class software.
As you can see, direct investment by SMSFs is concentrated in the big four banks that take out four of the top six spots, with Macquarie Group also in the top 10. Mining heavyweight BHP retained its position as the most popular Aussie stock, with almost half of all Class SMSFs with domestic shares holding the Big Australian in their portfolios. Woodside Energy was the big mover in 2022–23, jumping nine places to second most popular stock thanks to an in-specie distribution during the period.
While some companies have shuffled positions, the top eight are the same as the previous year, while CSL and Macquarie Group edged out Coles and Woolworths to round out the top 10. The only new faces in the top 20 are Amcor Plc (formerly Amcor Ltd), a global packaging company, Sonic Healthcare and Ramsay Health Care, edging out Fortescue Metals, Suncorp and AGL Energy.
Against an economic backdrop of high inflation and rising interest rates, which traditionally reduce the appeal of shares, domestic shares held up well in 2022–23. While Australia’s cash rate lifted from 0.85% to 4.1% over the year, it was still short of the attractive dividend yields on offer. But with inflation remaining stubbornly high and the potential for further rate hikes, economic growth forecasts have been trimmed. For these reasons, the outlook for shares remains challenging with further volatility likely.
That said, the total return (dividends and capital growth) from Australian shares is still better than money in the bank.