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 February 2017 (for data on SMSF growth as at December 2016, and for asset allocation data as at September 2016).

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.

Note: All SMSF statistics in this article are as at 31 December 2016 (fund profile information) or 30 September 2016 (asset allocation), unless otherwise stated.

The one million super club

Nearly 600,000 SMSFs (585,260) run by more than 1.1 million trustees control more than $650 billion in total assets ($653.8 billion), as at 31 December 2016. As at 30 September 2016, just over 580,000 (581,736) SMSFs, controlled $635 billion in total assets, or $611 billion in net assets (total assets less borrowings and other liabilities).

A more impressive statistic is that as at 31 December 2016, SMSF trustees control around a third of all superannuation money (32.4%) held by Australians in both APRA-regulated super funds and self-managed super funds. In 2004, SMSFs controlled only 20% of all superannuation money. (For more information on the main types of super funds, see SuperGuide article Comparing super funds: Who’s who in the super zoo?).

A fascinating aspect of this growth in SMSFs is that the investment behaviour of the 1.1 million-plus SMSF trustees is capable of influencing investment markets. According to one investment expert, the desire by SMSF trustees for shares paying franked dividends is driving up the prices of high yield shares, such as bank stocks (despite the recent volatility), while another expert claims the SMSF love affair with companies that pay franked dividends is putting the long-term income of SMSF members at risk as companies review dividend policies, and in turn, SMSF trustees are inadvertently creating higher-risk investment portfolios. Other experts are urging SMSF trustees to invest in overseas investments, while some politicians are eyeing SMSFs as a source of funding for major infrastructure projects.

Another recent example of the clout of SMSF trustees is the interest in SMSF property investment by the professionals in the property market. Due to relaxed borrowing rules (introduced in 2007) and to the ever-growing SMSF fund balances, now averaging more than $1.1 million ($1,117,110, as at December 2016), estate agents, property developers and banks believe there is money to be made by promoting property, using gearing, to SMSF trustees.

Note: Although the average SMSF balance is more than $1.1 million, the average SMSF account balance is now roughly $594,000 (based on December 2016 figures of $653.8 billion in SMSF assets and dividing this amount by an estimated 1.1 million SMSF members). The higher-than-industry-average account balances reflect the much older profile of SMSF members, and the need to have substantial assets to justify the cost of running a SMSF.

Another relatively recent example of the financial influence of SMSF investors is the uproar over the Cooper Review (circa 2010) 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 since been introduced and took full effect from June 2016, for those investments held in 2011, when the laws changed) highlights the importance of the SMSF money to many investment markets in Australia. (For more information on the stricter rules for artwork see SuperGuide article SMSF reminder: Stricter rules for artwork and other collectibles from July 2016 SMSF reminder: Stricter rules for artwork and other collectibles from July 2016 ).

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 June 2015, the three main asset categories represented 70.6% of all SMSF assets. SMSFs held 30.44% of fund assets in direct Australian shares, 25.4% in cash and term deposits, and 14.74% in direct Australian property.

As at September 2016, the allocation to the three main asset categories shifted slightly, but still represented similar allocation, namely 70.5% of all SMSF assets. SMSFs held 30.3% of fund assets in direct Australian shares, 24.8% in cash and term deposits, and 15.4% in direct Australian property.

In the past 15 months, the allocation of SMSF investment towards listed shares has remained steady (32.1% as at March 2014, to 30.44% as at June 2015, and 30.3% as at September 2016), while allocations to cash have dropped again (from 28% as at March 2014, to 25.4% as at June 2015, and 24.3% as at September 2016).

Property: Surprisingly, allocations to direct property dropped from 15.9% in March 2014, to 14.74% in June 2015, and but increased again to 15.4% as at September 2016. Although over the 36-month period (from March 2014 to September 2016), the amount of SMSF money directed to investments via limited recourse borrowing arrangements increased considerably from 1.7% of total assets in March 2014, to 2.954% of total SMSF assets in June 2015. The one proviso to this fairly significant increase in LRBA allocation is that the ATO improved its data collection of LRBA statistics from June 2014. The amount of SMSF borrowings as at September 2016 increased to 3.68% of total assets.

LRBA note: The original amount reported by the ATO as allocated to LRBAs in March 2014 was $2.781 billion, while the adjusted amount for March 2014 jumped to $9.081 billion after the ATO improved its data collection. The difference works out to be a threefold increase overnight for March 2014 figures. While this particular increase is due to a statistical adjustment, the ATO also acknowledges some growth in the use of LRBAs since the data collection method was improved. The overall increase in allocation to LRBAs is demonstrated by the roughly 1 percentage point increase in allocations to LRBAs between March 2014 (revised figures) and June 2015, and another three-quarter percentage point increase between June 2015 and September 2016 (although in dollar terms, this represents roughly a $2.2 billion increase in LRBAs).

Asset allocation: the remaining 29.5% of assets

Of the remaining 29.5% of the $636 billion in total SMSF assets (as at September 2016), 14% was held in trusts (9.7% in unlisted trusts and 4.3% in listed trusts), 5% in ‘other managed investments’ and the remaining 10.5% spread across 12 other categories.

Ten 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.

SMSF investments: gross asset allocation across all SMSFs

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 from ATO’s SMSF statistical report September 2016, and the December 2016 statistics from APRA’s Quarterly Superannuation Performance December 2016 (issued 21 February 2017). Data for June 2011 sourced from 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 based on actual return data for the 2015 financial year for specific fund size asset allocation. I compare the 2015 data (extracted July 2016, and latest available information as at February 2017) 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 $100,000 and up to $200,000). In 2015, SMSFs of this size held 24% of fund assets in direct Australian shares, 48% in cash and term deposits, and 6% in direct property. Of the remaining 225% of assets, 8.4% was held in trusts (5.5% in unlisted trusts and 2.9% in listed trusts), 2.8% in ‘other managed investments’ and the remaining 10.8% spread across 12 other categories. In 2004, SMSFs of this size (or more specifically, at least $150,000 and up to $200,000 in assets, due to a recent change in categories reported by the ATO) held 31% in direct Australian shares, 30% in cash, term deposits and debt securities and 10% in direct property. In 2015, there is a greater weighting to cash. The weighting to direct property for this fund size has dropped by nearly half over the 10-year period, 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 2014, SMSFs of this size held 26% in direct Australian shares, 33.4% in cash and term deposits and 13.2% in direct property. Of the remaining 27.4% of assets, 9.2% was held in trusts (6.2% in unlisted trusts and 4.0% in listed trusts), 4.0% in ‘other managed investments’ and the remaining 14.2% 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 has remained relatively steady over the 10-year period. In 2015, again there is a greater weighting to cash.
• Fund balance (at least $500,000 and up to $1 million). In 2015, SMSFs of this size held 28.5% in direct Australian shares, 28.8% in cash and term deposits and 15% in direct property. Of the remaining 27.7% of assets, 11.4% was held in trusts (6.9% in unlisted trusts and 4.5% in listed trusts), 4.8% in ‘other managed investments’ and the remaining 11.5% 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 2015, again there is a greater weighting to cash.
• Fund balance (at least $1 million and up to $2 million). In 2015, SMSFs of this size held 31.3% in direct Australian shares, 27.3% in cash and term deposits and 14.6% in direct property. Of the remaining 27% of assets, 12.9% was held in trusts (8.2% in unlisted trusts and 4.7% in listed trusts) and 5.2% in ‘other managed investments’. The remaining 7.3% 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 2015, there is a greater weighting to cash and a drop in the money allocated to trusts, compared to 2004 (although in recent years the allocation to trusts has increased but not yet back to the 2004 levels).

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 $200,000 and $500,000 million, invariably, roughly three-quarters of SMSF money is invested in three asset classes (direct Australian shares, cash and direct property).
• Based on overall statistics as at September 2016, all SMSFs, on average, invest around 71% of SMSF money in the three main asset classes. On average, around a third of SMSF assets are invested in direct Australian shares (30.3%), just under a quarter is held in cash and term deposits (24.8%), and 15.4% is 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 (55%) in cash, and the SMSFs with balances of less than $100,000 (but more than $50,000) hold 51% of fund assets in cash. In contrast, SMSFS with more than $5 million in assets hold between 16% and 21% 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 (22.3%), but even so the asset allocation to direct Australian shares from smallest funds to largest SMSFs is a small range from 22.3% through to 33.1%.

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 74% to 77% of assets in two asset categories – direct Australian shares, and cash and term deposits.

February 25, 2017 by Trish Power 7 Comments