SMSF assets reach $1 trillion, with record level of investments in property and cash
Many self-managed super funds (SMSFs) are taking a gamble with their retirement savings, pouring record amounts into cash and property while ignoring the stability of fixed income investments, according to Tim Keith, Managing Director of private credit fund manager Capspace.
New data from the Australian Taxation Office (ATO) also reveals a near record level of share investments, which could leave SMSF investors vulnerable in the face of economic uncertainty and any correction in share markets.
Despite overall SMSF assets surging to a staggering $990.4 million in the June quarter of 2024, a worrying 16.4% – a record $162.4 billion – is languishing in cash and term deposits. According to the official data, SMSFs ploughed another record $157.8 billion into direct property, representing 16% of their total assets. The ATO data also shows SMSFs invested $293.9 billion in Australian and overseas shares, accounting for around 30% of total assets.
However, Mr. Keith said it is important for SMSFs to incorporate fixed income investments into portfolios to provide a defensive buffer against market fluctuations.
“This overreliance on property, shares and cash raises red flags about diversification and risk management for SMSFs,” Mr Keith said.
“A balanced portfolio is crucial for long-term financial security, and fixed income assets offer stability and regular income in the face of economic uncertainty and share market volatility. However, with just $12.1 billion invested in debt securities and another $6.3 billion in loans, SMSFs are still largely ignoring fixed income investments; these are tiny amounts given that SMSFs have almost a trillion dollars in assets under management,” he said.
With such high allocations to Australian property, shares and cash, SMSFs would arguably benefit from investing more in fixed income, which can deliver higher yields than property or term deposits with far less volatility than shares, according to Mr Keith.
Reserve Bank data reveals that the average interest rate on one-year term deposits fell to 4.3% in August from 4.5% in July, while the rate on three-year term deposits fell to 3.8% from 3.95%.
“In contrast, yields on many private credit funds sit at around 10% per annum and that is especially attractive with falling term deposit interest rates. The Capspace Debt Fund yielded a return of 9.31% p.a. in September with interest paid monthly,” Mr Keith said.
“As investors approach retirement, many are looking for ways to transition to higher-yielding fixed income investments away from cash and residential property which dominates Australians’ wealth portfolios. One of the key advantages of private credit is the access to regular monthly income at higher yields, which can provide retirees with a steady and reliable cash flow.”
Private debt consists of privately originated corporate loans across a range of risk-return profiles. These loans are not traded on the public markets, unlike corporate bonds. The private debt market has grown rapidly; assets under management for the global private debt market topped US$2.1 trillion (A$3.15 trillion) in 2023.
“Private credit, or non-bank lending to companies, offers Australian investors an attractive and regular income stream and capital protection through stringent loan process, and for that reason can offer investors very attractive risk adjusted returns which smart investors are including in the fixed-income portion of their portfolios, ” Mr Keith said.
