SMSF’s a reaction to past underperformance….

This is anecdotal, but seems to be a recurring theme as I go about the markets:

  • Super funds in general have suffered over the last 5 or so years, predominantly due to under performance of listed equities
  • This has led to many stakeholders (including those with $200k to $1m) ┬áleaving the managed sector and setting up SMSF’s. They are fed up with the poor performance they have suffered. Having paid significant fees, they are frustrated with the benefit they’ve seen. They are unhappy with the managers of their funds, and have generalised this sentiment to cover all managers. They genuinely believe they can do better by investing themselves
  • Because of prior experience, they are focused on yield, and preservation of capital.
  • This means that they are buying fixed income and hybrid debt securities. They see these as a way to generate return without risking their capital (no comment on this assumption). The result is a move towards instruments with decent yield, which means they are taking credit and duration risk.

As a result, these SMSF portfolios are now generating decent returns (say 5-10%). Risk and diversification vary, but the theme is yield. They are currently performing well (probably outperforming equities). The trustees are comfortable, and see their actions (both setting up SMSFs and current investment choice) being validated. They have no plans to change their investments.

But

What happens when the equity markets take off (this is an assumption, but at some stage it will happen – possibly after several false starts). The SMSF portfolios will continue receiving fixed income returns, and miss out on equity upside.

? Is the status quo a justifiable risk/return proposition.

? Should these funds have some degree of diversification. Should they have an allocation to equities.

? Are the trustees (who are generally the beneficiaries themselves) being fiduciarily responsible, or are they over reacting to past (under)performance.

? Is there enough knowledge amongst SMSF trustees (especially at the smaller end), that all of the above is an informed choice, hence it is completely justifiable.

?Should anything be done or am I making unnecessary noise.

All of this, as I mention, is based on anecdotal evidence. This includes discussions with private wealth managers, bankers and those who have set up SMSFs over the past two years.

This is just the observation of one person. I’d be interested in the reactions, comments or thoughts from others.

Click here for a chart of the ASX 200.

 

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