SMSF asset allocation: it's the mix that counts

It's hard to get a decent return out of cash and term deposits when interest rates are at a 60-year low. The most you can get these days is a measly 3% to 4%, which means you are barely treading water.

"It's particularly bad now with interest rates around 3% and inflation around 3%," says Noel Whittaker, adjunct professor at QUT Business School. "Even in a tax-free pension fund the real return is zero.

"A self-managed super fund [SMSF] needs growth assets such as shares but it also needs cash for at least two years' planned expenditure so it won't need to cash in good assets if the market is having one of its normal downturns.

"Keep in mind that the fund is required to pay out a required minimum each year when it's in pension phase and it needs cash to do that."

Trustees like cash and term deposits because they are bank-guaranteed and an important anchor when it comes to capital preservation.

Despite last year's strong rise in equities there wasn't a significant shift by SMSFs out of "the wall of cash" into higher-risk assets, according to research commissioned by the SMSF Professionals' Association of Australia (SPAA) and Russell Investments.

The research found only a small drop, with 31% allocated to cash and term deposits in 2013, compared with 34% in 2012.

It also found 70% of trustees preferred direct investments (shares, term deposits and property) while only 25.7% used funds.

With good advice trustees can get higher returns for fixed interest if they are prepared to take on greater risk.

"There are shares paying good dividends, and hybrids which offer capital growth as well as yield," says Whittaker. "There are also unsecured notes paying more than 6%. And if you are prepared to suffer lack of access, there are property syndicates paying 11% per annum."

John Hewison, of Hewison Private Wealth, says with asset allocation you can't take things in isolation.

"Each investment has got its own attributes and one will complement the other. It's a constant rebalancing back to the core asset allocation that is very important."

It was a "no brainer" buying bank shares when the market was at its lowest in 2009, he says.

"In the case of cash flow, we were buying into the stockmarket, buying significantly high-dividend inflows, which have helped to maintain the cash flow requirement for our clients so that it's offset the decline in interest rates." Listed income securities such as convertible preference shares and convertible notes producing 6%, as well as carefully selected property syndicates, are in the mix.

"But we use term deposits as well, depending on the client profile," says Hewison.

But make sure there are enough safe investments says SPAA's Graeme Colley. "At least with a term deposit you know you will get your capital back even if it's eroded by inflation."

Joint trustees

Many SMSFs have husbands and wives as joint trustees. With about one in three marriages ending in divorce, it gives rise to a number of issues for SMSFs to deal with.

Property is an illiquid asset and if it dominates the portfolio a forced sale can result in a much lower price being achieved.

To cover for contingences such as death and divorce it's much more prudent if the allocation of funds to property is 50% or less of the entire portfolio.

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