SMSFs struggling to balance risk and return

August's sharemarket rout will have left self-managed super fund investors feeling vindicated for stockpiling cash. SMSFs are often derided for being too defensive and holding too much of their savings in cash.

Two surveys, conducted between November 2014 and April this year, showed SMSFs remained unconvinced and bearish in the face of a rising market, with one survey noting their "level of concern in relation to investments increased".

Graeme Colley, the director of technical and professional standards at the SMSF Professionals' Association of Australia, says SMSF investors tend to be astute. "Trustees are very bearish at the moment. They tend to be 90 days ahead of the market compared to other investors. That not only comes out in our own research but also in research published by Investment Trends."

Vanguard's Investment Trends annual survey of almost 4000 trustees and 501 advisers, conducted in March-April, reported that SMSFs were sitting on excess cash because of "a poor market outlook". It found they had adopted defensive strategies in making asset allocations in the previous year. "In line with this trend, SMSFs stockpiled excess cash in their portfolios. Total cash is estimated to have increased from $146 billion to $160 billion, with excess cash - funds that would have been invested but were not because of market uncertainty - growing from 30% to 35% within the total cash pool."

The survey found direct shares remained the dominant SMSF asset class at 41%, down slightly from 44%. The average number of stocks held remained steady at 18 but they were heavily concentrated, with more than half represented by either resources or financial stocks.

Allocations to listed and unlisted managed funds continued to increase, growing to 18% of total assets, up from 15% last year. SMSFs cited diversification and access to international markets as the key reasons they used such funds.

Robin Bowerman, Vanguard's head of market strategy and communication, says portfolio concentration poses some risk. "However, it is positive to see investors, both advised and unadvised, increasing their diversification through vehicles like managed funds and ETFs."

CoreData's annual survey of SMSFs, made in November-December for the SMSF Association and nabtrade, also showed SMSF used funds to diversify, especially to international shares. Intimate with Self-Managed Superannuation showed trustees were wrestling with record low interest rates and many were looking to put some cash in fixed interest and bonds. It found the average proportion of cash held by SMSFs had fallen from 20% in 2013 to 16%. "On the other hand, the average allocation to Australian equities has risen since 2013 from 36% to 43%," it said.

It noted a slight decline in the average allocation to residential property and a rise for international equities. "While trustees continue to most commonly cite Australian equities as a likely destination for their cash, international equities and bonds are likely to garner greater interest among SMSF trustees in the near future." The report said the falling Australian dollar and its poor outlook were likely to have contributed to the popularity of international equities.

"While trustees recognise that holding cash is one way to de-risk their SMSF portfolio, they are also seeking to move funds out of cash to other asset classes that are inherently more risky in a bid to achieve better returns than those currently offered by cash. These findings suggest that trustees are trying to balance their investment risk and return objectives."

SMSF investors are caught between a rock and a hard place, says Colley. "Many SMSFs have been leaving their savings in cash because they weren't seeing shares and property as good investments. Many saw them as overvalued."

But low interest rates are forcing them to reallocate their cash to term deposits, online saving accounts and bonds, depending on where they see interest rates heading. "They are being very careful to make sure they are getting better-value investments."

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