Gen-yers increasingly interested in SMSFs.

The demand for SMSFs among younger people is growing apace, according to the latest research report commissioned by the SMSF Professionals’ Association of Australia (SPAA) and Russell Investments.

The report, titled “Intimate with Self Managed Superannuation”, found that although people aged over 50 still comprised the largest number of SMSFs, the strong growth was in the younger demographics.

“It is the 41-50 age group that continues to be the largest source of demand, as cited by three-quarters of financial planners. This is followed closely by those in the 31-40 age group, where two out of three advisers are expecting greater demand from them.

“It is this younger demographic that has exhibited strong growth over the past three years. They are interested in the longer term and have a good understanding of the short-term issues versus the longer term opportunity,” the report says.

Intimate is the fourth consecutive report on the state of the SMSF sector based on two online surveys developed by CoreData in partnership with SPAA and Russell. A total of 1,267 Australian consumers were interviewed, of which 385 were SMSF trustees and 882 did not have an SMSF.

SPAA CEO Andrea Slattery says: “The continuing strong growth in the younger demographic is both significant and encouraging. It means more young people want to take control of their retirement incomes, and, for the professional advisers it creates the opportunity to grow their businesses.

“As the report found, the popularity and awareness across superannuation remains high as evidenced by the sector’s growth in terms of FUA, accounts and members.

“Although the proportion of superannuats looking to establish an SMSF in the next five years has dropped from 12.3% from 17.3%, the intention still remains high over the longer term with 14.3% of the non trustees likely to set one up over the next five years.”

Contribution caps and constant legislative change, however, are still taking their toll. Slattery says that for the fourth successive year, SMSF trustees have said that they under-invested in their future retirement by $16 billion a year because of these factors.

On the investment front, the report says the expected movement out of cash in 2013 because of the strong rise in equities simply did not occur. In 2012, the allocation to cash was 33.9% and in 2013 this figure had only fallen to 31%.

Australian equities did not benefit, however, witnessing a slight decline from 37.1% to 36.1%, with residential property benefiting with a rise from 5.6% in 2012 to 9.9% in 2013.

Based on these numbers and the fact that international equities rose sharply in the 2013 calendar year, the report says there is a real opportunity for financial planners to educate trustees about the benefits of diversification “but also how risk as a concept is not related to asset classes along the risk curve but is also related to risk as an opportunity cost”.

Scott Fletcher, Director, Client Investment Strategies, Russell Investments says: “It is clear from the report that investment advice is most valued by SMSF trustees.

“It’s not all about picking stocks and sectors; SMSFs need to tap into strategic investment advice to help them achieve their desired goals and deal with complex issues such as sequencing risk, and the impact of this on retirement outcomes. There is a real opportunity for advisers to step up into this role.

“Like all investors, the preferences and biases of SMSF investors have a significant impact on their strategic asset allocation and their ability to link goals to outcomes. This is an underappreciated aspect of portfolio design that advisers can shed light on. Often, SMSF investors will jump straight to the vehicles they prefer to invest in, bypassing the all important goal-setting and asset allocation steps in the process.“

The report adds that it will be a challenge for financial planners to educate trustees about the potential opportunities available in other asset classes outside of cash and direct Australian equities.

“However, given trustees’ dislike or lack of understanding of diversification, planners need to demonstrate the value of other asset classes and how these can play a role in helping trustees achieve their retirement objectives.

“This will be a difficult challenge, however, as three in five trustees claim they have a “strong” or “very strong” knowledge of investments compared with non-trustees, with the majority (51.9%) using their own research process,” the report says.

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Investors switching on optimism about sharemarket.

Rising confidence about global growth prospects, coupled with the fall in the Australian Dollar (AUD), has led investment managers to be optimistic about the share market, according to new research produced by global asset manager, Russell Investments.

The Investment Manager Outlook (IMO) is a biannual survey which captures the views and insights of around 30 Australian fund managers on market sentiment and their views on sectors, styles and upcoming trends affecting investment strategy.

Bullish sentiment is rising for both international and Australian shares, with managers preferring international shares (71%) over Australian shares (65%). 71% of managers now consider Australian shares to be fairly valued.

According to Russell Investments Director of Client Investment Strategies, Scott Fletcher, this shift in sentiment shows that managers have greater confidence in the global recovery.

“With improving U.S. economic data and signs of growth picking up in the Euro-zone, it appears managers believe the worst is over and share markets can move higher in the medium term,” he said.

The survey also reveals 74% of managers are positive about the Coalition’s victory, as many expect more consistent policies and the removal of mining and carbon taxes to reduce uncertainty and increase investor confidence.

However, while the recent election and change in government is considered a positive, Mr. Fletcher warns issues remain in the marketplace which could create market instability in the short term.

“Considering the ongoing discussion around Fed tapering and the geopolitical unrest, we remain cautiously optimistic on the domestic share market in the near term. Events such as the U.S. government shutdown and potentially higher bond yields are significant short term global risks that might cause market volatility to rise,” he said.

The survey also reveals the exporting sector of the market to be a major beneficiary of AUD depreciation over the past six months. This is expected to continue as 81% of managers believe the dollar will settle between 81 and 90 U.S. cents in the next 12 months.

Declining commodity prices, economic growth and diverging interest rate movements are the key themes that managers expect will drive the performance of the AUD going forward.

Manager preference for cyclical assets continued on a sector level, with the biggest shifts in bullish sentiment in energy, up from 42% in the last survey to 77%, and materials, up from 39% to 58%. The energy sector has

benefited from recent oil price gains, which is expected to continue provided the Chinese and U.S. economies stabilise and improve.

On the flip side, A-REITs, domestic bonds, cash and the AUD are some asset classes which managers continue to remain bearish.

The results of the survey largely indicate fund managers consider share markets to hold the best investment opportunities both at home and overseas: Russell’s strategists broadly agree with this among signs of market recovery, but investors need to be wary of near term risks which add uncertainty.

“At Russell, we believe in the importance of closely monitoring and responsibly adapting to changes in the market environment in order to manage risk and capture investment opportunities as they arise. Responding is one thing, but the ability to separate ‘noise’ from ‘substance’ will help keep investors focused on the main game and avoid knee-jerk reactions. This is where global access to capital market insights becomes critically important in informing portfolio changes” Mr. Fletcher said.

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Scott Fletcher

Australian shares have outperformed other asset classes over the past 10 and 20 years, according to the latest Russell Investments/ASX Long-Term Investing Report, but Russell warns investors need to be truly diversified and take a more active approach to deal with an increasingly changing market environment for the next 10-20 years.

The 15th edition of the annual report, commissioned by the Australian Securities Exchange (ASX) and prepared by Russell Investments, found the two key themes dominating investment returns for the past 10 and 20 year periods were falling bond yields in Australia and globally, as well as strong domestic economic growth driven by the resources sector – two major factors that look to change going forward.

“This report offers investors some practical guidance on the performance of different asset classes and in particular the benefits of ASX-listed investments over the longer term,’’ said ASX Business Development Manager Jonathan Morgan.

The report demonstrates the benefits to be gained from diversifying across multiple assets. Comparing the results for the 10 year period in this year’s update to last year’s report, the ranking of asset classes has changed significantly. Last year’s winner – hedged global bonds slipped to third place this year with a return of 7.9% p.a. while last year’s runner-up – Australian residential property slipped to fifth place at 6.5% p.a.

Instead, Australian shares and hedged global shares took first and second prizes this year at 8.9% and 8.2% respectively, thanks to the very strong risk rally in 2012. In contrast, cash remained unchanged at 3.8% p.a. while unhedged global shares was back in the black at 1.4% p.a., but still suffering from the very strong appreciation in the Australian dollar over the last 10 years to 31 December 2012. All these returns were against an inflation rate of 2.8% p.a.

The report also considers the impact of tax, costs and borrowing on ultimate investment returns. The aim is to provide investors with insight into how different investments have performed over the medium to long-term, after-tax and expenses. The difference in after-tax returns between types of investors in the same asset class highlights opportunities to choose the right investment structure. For example, the value of investing in Australian equities via a superannuation vehicle rather than directly was an additional 2.4% in returns to high marginal tax rate investors over 10 years.

Triple-treat investment returns a rarity

Over the past 10 years investors exposed to a number of Australian assets enjoyed a ‘triple-treat’ of investment returns. This came from Australian shares, Australian currency and Australian residential investment property.

Scott Fletcher, Director Client Investment Strategies, Asia Pacific, at Russell Investments said “Australia has experienced less extreme market fluctuations during and recovering from the global financial crisis – compared to those in the Northern Hemisphere – as the strong resource sector activity offset weaker domestic growth,” he said.

The Australian dollar has doubled in the last 10 years starting from around US$0.50 off the back of phenomenal commodity prices.

Australians’ love affair with bricks and mortar, supported by relatively low unemployment, solid growth in disposable incomes and falling borrowing costs, has also seen housing prices increase persistently over most of the past two decades.

Forward looking glasses: the next 10-20 years

Going forward, Mr Fletcher said investors needed to substantially adjust their expectations and revisit the traditional approach to investment and asset class diversification going forward. In a supplement to the report, Russell explored how likely the historical returns would be repeated over the next 10-20 years.

“There are a number of aspects investors need to consider with forward looking glasses, rather than looking in the rear view mirror,” Mr Fletcher said. The conditions that produced the ‘triple-treat’ returns from domestic shares, currency movements and residential property were unlikely to be sustained.

“The two speed domestic economy driven by mining activities has slowed to a single pedestrian-speed growth outlook and this will impact returns from multiple domestic assets in the future.” Mr Fletcher said.

“Although the AUD has fallen more than 12% in Q2 2013, it is still overvalued relative to history. Looking to the next 10-20 years it is unlikely that the currency will appreciate much further, and boost hedged returns by the same amount as in the past.

Another trend that is very unlikely to continue is the multi-decade trend of falling government bond yields. While these have contributed to very strong performance in domestic and global bond markets for the last 20 years, especially providing investors with safe havens in volatile times, more realistic expectations for bond market returns for the next 10-20 years are in order.

With yields off historical lows and returns harder to come by, Russell Chief Executive Asia Pacific, Alan Schoenheimer, said that investors who have been heavily reliant on bonds in the past really need to move to other sources of returns outside traditional government bonds to generate sufficient returns going forward. ”We know these investors need exposure to growth assets, but may not be able to stomach the volatility from equity markets. This is why an active strategy that relies on truly diversified sources of returns from a range of assets makes sense.”

“In addition, innovative bond strategies that move away from conventional developed market exposures to include emerging market bonds and other strategies (such as currency, credit and long/short) that are less sensitive to interest rates will help,” he said.

“Russell is seeing a new breed of investment solutions being developed to meet the needs of these investors. Actively managed, multi-asset approaches are one way to long-term investing for the changing landscape.” Mr Schoenheimer concluded.

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