13 July 2019
James Kirby – Wealth Editor
For a moment there it looked like the entire self-managed super fund scene was in a tailspin: thriving industry funds, woeful tales of bad financial advice and a deeper sense that for many the entire experiment in self-directed retirement had lost its way.
Yes, growth in the SMSF sector is slowing.
But the SMSF scene is alive and well. Moreover, SMSF operators are getting younger, they are starting funds with less money than previously and importantly they are double-dipping in a very smart way, with almost half of those launching new funds making sure to retain investments in their original employer funds.
Our picture of the sector gets better each year, with better data. The latest Vanguard/Investment Trends survey, which is based on no fewer than 5000 SMSF operators and 300 specialist planners, offers an exceptional snapshot of the market.
There are 20,000 new SMSF funds opening each year (against 40,000 a decade ago). However, there is every chance this number will grow from here now that the Morrison government has been returned and the threat of a pro-industry fund ALP regime has been removed.
More importantly, the big development this year is what might be tagged as the “hybrid approach” — keeping two funds going for different purposes. The new generation of SMSF operators are not “anti-industry funds” — it would seem they are much too smart to take an entrenched position of that sort when there are advantages to having one foot in the APRA-regulated fund sector.
Until very recently, the choice between SMSF and big funds was seen as binary — you went one way or the other. But now it is common to use both formats for different purposes. The survey shows that almost half (49 per cent) of people who started SMSFs last year held on to money inside their former funds as well. What’s more, that figure is climbing fast — it was only 29 per cent in 2017, then 34 per cent in 2018. Investors are holding on to money inside the larger funds primarily to keep their access to cheaper life insurance: big funds get better rates than if you are operating by yourself in an SMSF.
However, Michael Blomfield, chief executive of Investment Trends, also says people are leaving money inside industry funds to diversify, especially to get access to unlisted investments such as infrastructure and private equity.
“It’s what you might call a core and satellite approach,” says Blomfield.
Indeed, this trend has been exploited by industry fund Hostplus, which has just launched a range of funds that SMSFs can access without actually becoming members of Hostplus.
If this so-called self-managed option experiment at Hostplus succeeds, no doubt a string or rival industry funds will copy the initiative in the years ahead.
Younger and younger
Separately, the survey shows a median SMSF commencement age of 47 (down from 52 in 2010) and a median starting amount per capita (per trustee) of $230.000.
This is surely a healthy development and suggests the sector is going to become more mainstream and less heavily identified with wealthier, older Australians than it has been in the past.
Just to look at the trend a little closer, the median amount trustees have when starting a new fund has dropped consistently — it was $420,000 before the global financial crisis and $320,000 in 2014. So much for analysts suggesting you need $500,000-$1 million to start a fund. SMSFs are for people who want to control and manage their own money.
This new research also attempts to answer one of the most commonly asked questions about SMSFs, which is how much time do they take to run? The easy response might be “how long is a piece of string?” After all, the more complex a portfolio the longer it is going to take to manage. Nonetheless, it is suggested on average the whole business takes eight hours a month (we’ll assume the survey did not try to measure that most elusive figure — time spent “thinking” about investment allocation).
Among the most obvious developments in the area is the steady and welcome diversification away from Australian shares and cash — though notably the average cash holding is still a whopping 25 per cent and it has barely changed even as rates have slid to historically low levels. Indeed, the allocation increased slightly over the past 12 months.
In terms of where the diversification is taking place, it is in the exchange-traded funds market, which is emerging as the key gateway to the wider world for private investors. There are 190,000 investors using or planning to use ETFs, up from 140,000 a year earlier.
There is also a consistent lack of confidence in the financial advice sector shown in the survey, which may improve in the months ahead as new standards are introduced in relations to educational qualifications for advisers.
Similarly, it would seem confidence levels on market returns are low, too. “Investors’ outlook for market returns is very low at 1.4 per cent, far below the expectations of many economists, including our own,” says Robin Bowerman, head of market strategy at Vanguard Australia.
One last thing: despite the gloom and doom among SMSFs, it looks like there has been a lot more talk than action. Examining the intentions of SMSF operators for the future, the survey found one in five had considered closing their funds over the past year — a fourfold increase on the numbers in 2013. But in reality, the actual figure was less than 10,000.