ATO data suggests cash-heavy SMSFs missed recovery window

New data on Self Managed Super Funds suggests very high cash holdings, indicating most funds missed the recovery from the March downturn.

Many self managed super funds have too much cash or term deposits.

It looks like many of Australia’s roughly 600,000 SMSFs, covering more than 1.1 million members, have failed to capitalise on our sharemarket’s growth.

According to Australian Taxation Office data, detailing the asset allocations for all SMSFs in the quarter to the end of June, many funds continue to have a high investment weighting towards cash and term deposits.

At June 30, 2020, SMSF trustees were holding about $191.5bn in Australian shares and $156.3bn in cash, representing 26.1 per cent and 21.3 per cent respectively of the $705.4bn in total SMSF assets.

While the value of holdings in Australian shares at the end of June was actually up considerably on the $165.3bn total value at the end of the March quarter, that’s largely explained by the 16.5 per cent rise on the local sharemarket between April 1 and June 30.

By contrast, the average returns from term deposit accounts were below 1 per cent in the June quarter, and remain so.

The stubbornly high percentage of SMSF assets in low-yielding cash is even more evident in the ATO’s data breakdown of asset distributions by fund size.

Its latest data has only recently been extracted, but relates to the 2018-19 financial year.

It shows that, on average, super funds with $1m-$2m had about 30 per cent of their total assets in Australian listed shares, and 23 per cent in cash and term deposits.

The next-largest holdings in this subset were unlisted trusts (10 per cent) and non-residential real property (8 per cent).

SMSFs with $500,000-$1m were holding about 25 per cent in listed shares and 24 per cent in cash.

Interestingly, the numbers started turning the other way in smaller SMSFs. Those with between $200,000 and $500,000 in assets were holding about 23 per cent in listed Australian shares and an even larger 29 per cent in cash.

For SMSFs between $100,000 and $200,000, the average holdings were 23 per cent in Australian-listed shares and 42 per cent in cash. And, for funds holding between $50,000 and $100,000 in super assets, the numbers were 23 per cent in Australian-listed shares and 45 per cent in cash.

Another observation from the ATO’s data is that many SMSFs are generally not well diversified into other major asset classes, including international equities and fixed interest.

Unlisted trusts, which by and large represent unitised unlisted property securities, are third-highest in terms of total SMSF assets, accounting for about $86bn of capital (11.7 per cent).

Commercial properties account for more than $73bn in SMSF assets.

Overseas shares, which accounted for $7.7bn of total SMSF assets at the end of June, rank outside the top 10.

The overweighting by SMSF trustees into Australian shares, cash and illiquid assets such as property has been on the ATO’s radar for some time.

In late February the SMSF regulator released new guidance for trustees around what should be detailed in their fund’s written investment strategy.

The ATO specifically wants to know from trustees how the asset allocations they make from their super fund assets supports their ­investment approach towards achieving their retirement goals.

For funds with too much asset concentration risk, trustees must justify their lack of diversification and how they believe this will achieve their overall goals.

While sharemarkets have rebounded since March, ongoing uncertainty will ensure equity markets remain volatile over the short to medium term.

At the same time record low interest rates will ensure ongoing poor yields from cash holdings, meaning those with large cash balances needing to generate income may need to consider other types of investment assets.

Diversification to offset risks across different asset classes is one of the key elements of every investment strategy.

The latest ATO asset allocation data once again illustrates that many SMSF trustees should be taking a broader investment approach.

Tony Kaye is senior personal finance writer with Vanguard at vanguardinvestments.com.au