COVID-19: SMSFs set to outperform

Published on
March 20, 2020
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SMSFs set to outperform

Self managed superannuation funds (SMSFs) could avoid the full brunt of COVID-19's impact on financial markets, thanks to higher than average exposures to cash and other low-volatility assets.

One quarter of the SMSF sector is held in cash and about 45% isheld in shares, compared to other super funds that hold 10% in cashand 60% in shares on average.

"This heavy exposure to low risk assets like cash mayprove to be fruitful in the current COVID-19 climate as they may bebetter protected than the average not-for-profit and retailfund," said executive director of research at RainmakerInformation, Alex Dunnin.

"Some super funds' diversified default investmentoptions have fallen 10-15% as a result of the current marketconditions."

Despite their potential strength in the current climate,contributions into SMSFs and small APRA funds fell by 60% over thelast two years, according to research from Rainmaker Information,published in their AdvantageReport.

SMSFs reached a peak of 33% of all superannuationfunds under management (FUM) in 2012, though this has since droppedto 26%, which is around $750 billion.

"A higher than average exposure to cash previouslydampened the returns of the average SMSF when compared to a retailor not-for-profit fund, so perhaps it also damaged theirappeal."

Interest in SMSFs has slowed in recent times, with the number ofSMSFs being started each year falling almost 75% from theirpeak.

Ten years ago there were a net 40,000 SMSFs started each year,though only 12,000 were started in 2019.

Simultaneously overall annual superannuation contributions havefallen from $157 billion to $130 billion, and SMSFs made up 90% ofthe reductions.

This number is even more significant given that SMSFs only makeup 9% of all superannuation members in Australia.

Superannuation and SMSF contributions

A key cause of the reduction in contributions into SMSFs appearsto have been the introduction of the Transfer Balance Cap (TBC) in2017.

The TBC removed unlimited tax concessions for retirees withlarge account balances.

Following its introduction retirees with large balances, many ofwhom were likely members of small funds, appear to have respondedby significantly reducing their contributions.

"The drop in contributions has been so extreme that SMSFsare only marginally ahead of the retail fund segment, which fellout of favour with Australians after the global financialcrisis," Dunnin said.

Other determining factors contributing to a decline incontributions are increased regulatory scrutiny, reductions intheir taxation advantages and persistent attention on thesegment's low benchmark investment returns.

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