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Myth: Lack of diversification in asset allocation choices Lack of diversification in asset allocation choices of SMSF trustees has long been the cry of those critical of this sector – too heavily weighted to Australian shares and cash. Many have gone further and claimed that lack of diversification within asset classes is of equal concern. SMSF trustees loading up on bank stocks, for example, is a common misconception. Fuelling the property bubble in the residential home market has also been levelled at SMSF trustees (with the added claim more recently, of using excessive gearing to achieve this). Inexperience with investment markets, comparative lack of access to data compared to “professional investment experts” and susceptibility to scammers are all raised as problems with the SMSF sector. You can’t help but feel that SMSFs must be responsible for all the problems besetting the whole of the Australian investment markets with this sort of track record, if it is true! Where do SMSF trustees really invest their money? You need go no further than Australian Tax Office (ATO) statistics to see where SMSF trustees as a collective group invest their money. Interestingly, the percentages of SMSF total assets invested in different asset classes has not varied significantly over the years, despite the growth of the sector to the largest single superannuation arrangement chosen by members in Australia. For the year ended 30 June 2016, SMSF assets totalled $622 billion. The percentages in each asset class were shown as follows: Australian listed shares – 30% Australian residential property – 4% Australian commercial property – 11% Cash & term deposits – 26% Overseas investments in total – 1% Listed & unlisted trusts & other managed investments – 19% Debts & loans – 2% Other investments – 7% The year ended 30 June 2011 told a similar story. Assets totalled $402 billion in the SMSF sector. The percentages breakup of the same asset classes were: Australian listed shares – 31% Australian residential property – 3.5% Australian commercial property – 11.5% Cash & term deposits – 28% Overseas investments in total – 1% Listed & unlisted trusts & other managed investments – 18% Debts & loans – 1.5% Other investments – 5.5% These figures show that, as a group, SMSF trustees have consistently invested in asset classes they are comfortable with and asset classes they can easily access directly. These figures show that, while there may be a bias to Australian investments, lack of diversification across asset classes generally is not an issue. It should be noted that traditionally exposure to international listed shares and property has been achieved by way of unlisted trusts and managed funds. There is likely to be additional exposure to these international asset classes in the “listed & unlisted trusts & managed investments” category totalling around 18 - 19% of total SMSF assets, where further breakdown of data is not available. The returns they have achieved also speak for themselves. Based on ATO statistics, for example, for the 8 years from the 2007 financial year to the 2014 year, SMSF returns outperformed large funds for four of those years. While in recent times, the predominant asset allocation of SMSF trustees has not performed as well compared to alternatives, it is still within reach. APRA statistics for the 2015 financial year, for example, show the return for SMSFs after expenses (excluding contributions) to be 5.7%. This compares to nonSMSF returns of 8.5% for the same period. These returns do not support the suggestion that SMSF trustees are dangerously out of their depth and incompetent in investing their members’ superannuation balances. Equally, the notion that SMSFs are fuelling a bubble in the residential housing market is not supported by the facts. As at June 2016, SMSFs have invested around $24 billion in residential property, just 0.4% of Australia’s $6.04 trillion residential property market. This amounts to a statistical error rather than an investment push distorting numbers! The same can be said for the claims of the use of limited recourse borrowing arrangements to add speculation to this investment into property. The total borrowings in SMSFs as at June 2016 was just over $21 billion or just over 3% of total SMSF assets. SMSFs are neither highly leveraged nor is there any suggestion that the entire borrowings in SMSFs are being used to acquire residential property alone. Commercial property and listed share purchases are well represented in the assets acquired using these gearing arrangements as well. For more detail on property myths and SMSFs see our other article titled “Myth: SMSFs are overexposed to property and are driving a housing price bubble”. For more comprehensive SMSF education and resources, visit the Trustee Knowledge Centre.