SMSFs reactive but resilient through volatile pandemic markets

Robin Bowerman

Robin Bowerman

Despite return and yield concerns during the peak of COVID-19 induced volatility, self-managed superannuation fund (SMSF) trustees are optimistic about market recovery, according to the 2020 Vanguard/Investment Trends SMSF investor report launched last week.

This year’s report surveyed over 3000 SMSF trustees on their investment priorities and industry outlook providing an insight into how trustees navigated through the volatility caused by the global pandemic.

While the SMSF market continues to grow, the impact of COVID-19 and subsequent macroeconomic uncertainty appears to have exacerbated the slowing rate of new SMSF establishment.

The size of the SMSF market now represents one-quarter of the Australian superannuation industry and currently sits at A$676 billion, a two-year low.

Greater control over investments remains the main reason investors set up new SMSFs however more trustees than ever are also maintaining their existing super fund.

Record switch to defensive assets

As a result of the extreme market uncertainty this year, nearly half of SMSF trustees surveyed made substantial changes to their asset allocation.

Some 55 per cent of SMSF trustees took a more defensive stance and increased their cash and property allocations, driven primarily by a negative outlook on both domestic and international equities.

Exposure to direct shares declined in line with the market sell-off in Q1 2020. On average, direct shares now comprise 31 per cent of SMSF portfolios, decreasing four per cent year on year and reaching levels last seen in 2009 post Global Financial Crisis.

One-third of SMSF trustees have fixed income exposure within their portfolios, with hybrid securities remaining the most popular product despite more investors turning to direct bonds and ETFs.

Although SMSFs have a desire to used fixed income products to diversify their portfolios and achieve a sustainable income, there is a lack of understanding of what constitutes a true fixed income product and the fundamental role they play within a portfolio.

“Investors should want their defensive assets to be truly defensive, especially when the market swings as wildly as it did earlier this year. Hybrid securities do not provide the same level of safe-harbor stability as high-quality bonds do as they still have equity-like features, and in times of market stress may not provide true diversification across asset classes,” said Robin Bowerman, Head of Corporate Affairs at Vanguard Australia.

“As ASIC warned in its May 2020 report on retail trading activity, investors are taking more risk in the fixed income space as a result of low interest rates and declining yields. For a better chance at securing steady retirement income and safeguarding returns in periods of volatility, SMSF trustees need meaningful portfolio diversification.”

Yield concerns

Findings also show that SMSFs’ dividend yield expectations have dropped from 4.8 per cent pre COVID-19 outbreak to 3.6 per cent.

“For pension phase SMSF trustees, who make up nearly half of all SMSF investors in Australia, these are very unsettling times with real concern about low yields and returns and how that will impact portfolio income,” said Mr Bowerman.

“Rather than focusing on an income-oriented strategy, a total-return approach – where an investor makes withdrawals from the full return of their portfolio – coupled with a spending strategy, can assist investors to take back control of their income stream”.

Optimistic on recovery, but still lacking in advice

Despite wavering confidence earlier in the year, SMSF trustees are relatively optimistic about market returns going forward.

More than ever, SMSFs are focused on maximising capital growth.

In the short-term, SMSFs show significant appetite to rotate back into equities with 37 per cent of trustees willing to increase their allocation to Australian shares, and 23 per cent to increase investment in international shares.

There is still a strong and growing preference for blue-chip shares and considerable appetite for ETFs and international shares.

The number of SMSFs with unmet advice needs continues to grow, with investment strategy review and pension strategy advice most sought after in these uncertain times.

Vanguard Personal Investor SMSF offer

Launched in early April 2020, Vanguard’s new Personal Investor offer delivers on Vanguard’s ongoing promise to lower the cost of investing by providing retail investors, including SMSFs, direct access to a wide range of Vanguard’s low-cost managed funds at wholesale rates and its Australian-listed exchange traded funds (ETFs) brokerage free.

Investors are also able to trade the top ASX shares by market capitalisation at $19.95 or 0.15% per trade (whichever is greater) and have access to an interest earning Vanguard Cash Account.

“We are excited to have seen more than 8,000 new account holders take up our new digital platform since we launched in April this year in the thick of the COVID-19 pandemic”, said Balaji Gopal, Head of Vanguard Personal Investor.

“Vanguard Personal Investor goes beyond a traditional brokerage account, designed to assist investors through functionality that promotes diversified, long term investing rather than short term trading – one of our enduring principles for investing success.”

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