This article has been written by expert contributor, Tony Kaye, Senior Personal Finance Writer, Vanguard Australia.
Many SMSF trustees are sharpening their focus on capital protection and income generation when selecting investments.
Australia’s self-managed superannuation fund (SMSF) segment is leaning to cash in light of concerns around current economic conditions.
The 2023 Vanguard/Investment Trends SMSF Investor Report, based on a survey of more than 2,000 SMSFs conducted between February and March this year, found that many SMSF investors had started to increase their allocation to cash and alternatives.
Looking forward, many SMSF trustees intend to sharpen their focus on capital protection and income generation when selecting investments. Direct shares have seen the largest relative decline in terms of SMSF asset allocation on a dollar-weighted basis.
One-in-five SMSFs participating in the SMSF Investor Report survey acknowledged that the prevailing economic conditions had significantly impacted their approach in selecting investments over the last year.
Of the SMSF survey respondents, 36% said they had rebalanced their investment portfolio in the past year by between 10% and 50%. This had resulted in their average asset weighting to direct shares declining from 36% in 2022 to 31%.
The primary reasons cited for this were because SMSF trustees had adopted a more defensive stance and had a negative outlook on overseas shares. More than a third of respondents said they intentionally increased their allocation to cash and had sold other assets for cash.
Looking forward, they are looking to sharpen their focus on capital protection and income generation when selecting investments.
The SMSF Investor Report notes that SMSFs seeking more control over their investments are, in the main, buy-and-hold investors. When surveyed about the way they manage their SMSF investments, 24% of respondents strongly agreed they buy and hold investments and a further 55% generally agreed.
By contrast, 26% of respondents strongly agreed or generally agreed they actively trade.
March quarter SMSF data
The Australian Tax Office’s (ATO) latest self-managed super fund statistical report, released in May, shows self-manager super investors had around $135 billion sitting in cash and term deposits at 31 March 2023. They also had around $261 billion invested in listed Australian companies.
Collectively, these two asset classes (Australian shares and cash) represented close to half (44.5%) of total SMSF assets at the end of March.
The ATO’s data shows that SMSFs controlled more than $889.5 billion in Australian and overseas assets, an increase of around $10 billion over the December 2022 quarter.
However, the total value of SMSF assets was still down on the peak level of $913.4 billion at the end of the March 2022 quarter – a reflection of the volatile trading conditions on global financial markets and the broad decline in listed and unlisted asset values over the past year.
The top 10 SMSF Asset Allocations
| Asset type | Value (millions) As of 31 March 2023 | Value (millions) As of 31 December 2022 |
| Listed shares | $261,047 | $256,429 |
| Cash and term deposits | $135,140 | $136,498 |
| Unlisted trusts | $114,911 | $113,070 |
| Non-residential real property | $87,759 | $87,392 |
| Limited recourse borrowing arrangements | $61,695 | $61,230 |
| Listed trusts | $55,816 | $55,604 |
| Other managed investments | $50,093 | $48,885 |
| Residential real property | $46,967 | $46,811 |
| Other assets | $23,843 | $23,406 |
| Overseas shares | $16,122 | $15,566 |
| Total | $853,393 | $844,891 |
Source: Australian Tax Office. Data as at 31 March 2023
SMSFs on aggregate had 95.9% of the total pool of SMSF assets invested into the 10 asset segments above at the end of March.
In dollar terms, SMSFs owned just over $261 billion in listed Australian shares (the ATO records SMSF shareholdings in overseas companies separately) at the end of March. It remains the largest asset class segment for SMSFs.
We recently wrote about the strong equities “home bias” by many Australian investors, including those investing outside of SMSFs, in the Smart Investing article What an Australian bias can cost a portfolio.
Real-estate investments remain strong
Meanwhile, the ATO’s quarterly data also shows that real estate remains a strong focus for many SMSFs.
Its unlisted trusts asset class (which includes holdings in unlisted property trusts) accounted for $114.9 billion (12.9%) of total SMSF assets at the end of March, followed by non-residential real property ($87.7 billion, or 9.8%).
SMSFs are able to own and lease a commercial property to fund members for business purposes. The total investment holdings in unlisted trusts in the ATO’s quarterly data is also likely to incorporate SMSF investments in other commercial property assets.
Related to this, and rounding out the top five SMSF asset holdings, were limited recourse borrowing arrangements ($61.7 billion), also known as LRBAs.
SMSFs may be eligible to take out a LRBA (loan) from a third-party lender and use the funds to buy assets such as a property (under strict conditions), which are held in a separate trust. In the event of a loan default, the lender’s rights are limited to the assets held in the separate trust.
At the end of March SMSFs also had almost $47 billion invested in residential properties across Australia.
Combining both non-residential and residential real estate holdings in Australia and overseas, SMSFs had more than $135 billion in direct property investments at the end of March this year.
Tony Kaye is Senior Personal Finance Writer at Vanguard Australia. In his role, Tony regularly produces topical investment-related articles and educational content designed to help investors make well-informed decisions.
Tony is a former managing editor and financial journalist, and his articles are published in Vanguard’s weekly Smart Investing newsletter and elsewhere.
The above material has been republished with the permission of Vanguard Investments Australia Ltd.