Low-yielding cash still king for SMSF investors

At March 31, SMSFs were holding about $149.4bn in cash and term deposit funds, representing just under 20 per cent of total ­assets.

Despite talk of inflation, there were no surprises with the Reserve Bank’s June monetary policy decision to keep the official interest rate on hold at 0.1 per cent.

Since cutting the cash rate to just above zero in November, the central bank has made it very clear that it won’t be lifting them again for some time.

In fact, RBA governor Philip Lowe reiterated this month that any increase in the cash rate would not happen until the inflation rate is sustainably within the bank’s 2-3 per cent target range.

“For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently. This is unlikely to be until 2024 at the earliest,” Lowe said.

The medium-term outlook for interest rates sends a strong signal that average investment returns from cash and term deposits will remain at record low levels for the foreseeable future.

After inflation, savings account fees and other costs are taken into account, net returns from holding cash will be negative, in most cases.

Yet it’s evident that many investors continue to have very high ­allocations to cash in preference to other asset classes.

A good reference point is the quarterly asset allocation data produced by the Australian Taxation Office for the nation’s 580,000 self-managed superannuation funds. SMSF trustees collectively manage about $754bn in personal super ­assets on behalf of just over a million people.

At March 31, SMSFs were holding about $149.4bn in cash and term deposit funds, representing just under 20 per cent of total ­assets. The only asset class with a higher allocation weighting than cash was listed Australian shares, which at $207.44bn accounted for about 27.5 per cent of SMSF assets.

International shares make up less than 2 per cent of SMSF assets. On an individual asset class basis, the next highest SMSF holding after cash is unlisted trusts, with investments totalling $99.2bn (13.1 per cent of total assets) at March 31.

Cash even surpasses the combined $127bn of self-managed super money invested into direct residential and commercial prop­erties, which make up about 16.8 per cent of SMSF assets.

Fixed-income securities, encompassing low-risk, highly rated government bonds, account for less than 2 per cent of SMSF assets.

One of the reasons for this could be a general lack of understanding by trustees of this asset class and how to access the bond market.

Ultimately, the primary reason that people have for setting up an SMSF is to have total control over how their super is invested.

Some SMSFs may have high cash allocations to ensure they can smooth out income payments to members in pension phase, especially during times of heightened volatility. Others may be keeping cash on hand to make lump-sum withdrawals during retirement.

Another often overlooked factor is the federal government’s deposit guarantee. In the event an authorised deposit-taking institution fails, the guarantee protects account holders up to a limit of $250,000. Superannuation laws require all SMSF trustees to prepare and implement an investment strategy setting out why and how they’ve chosen to invest in order to meet their retirement goals.

The ATO released specific guidance for SMSF trustees last year detailing what must be considered in their investment strategy in the context of the particular circumstances relating to each of the fund’s members.

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.

The latest quarterly SMSF asset allocation data illustrates that some trustees may need to review their fund’s investment strategy with a view to achieving greater asset class diversification.

Tony Kaye is senior personal finance writer with Vanguard