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Most SMSFs don’t understand diversification: Investment manager

More than 80 per cent of SMSFs think investing across 30 different Aussie shares constitutes diversification, but this is a misconception, a concerned investment manager has said.

“The definition of diversification is concerning, with 84 per cent of respondents considering an investment across 30 Australian shares represents a well-diversified portfolio, when instead it is harbouring high equity concentration risk and home country bias, in addition to very low levels of exposure to international shares and bonds,” said Robin Bowerman, head of corporate affairs at investment manager Vanguard.  

Speaking at a media briefing in Sydney on Tuesday, he expressed concern that while 82 per cent of SMSF trustees agree on the importance of diversification, only 54 per cent consider their portfolio to be suitably diversified. 

“We believe while there is a growing understanding of diversification, SMSFs seem to be bearing significant risk, largely relying on continued success of the Australian sharemarket, which represents just 3 per cent of the global investable equity market.” 

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According to the latest report from Vanguard and researcher group Investment Trends, 50 per cent of SMSF trustees have at least half of their portfolio invested in one investment type. This is often direct Australian shares. 

The report, based on a survey conducted between February and March 2018, also revealed that the number of SMSFs being established has hit a 10-year low. It dropped to 4.8 per cent from a 2010 high of 9.3 per cent.

At the same time, SMSF assets have grown over the year to March 2018, despite market uncertainty and doubts about investment opportunities. The average balance grew to $1.24 million.

However, this same uncertainty is also seeing 6 per cent of SMSF money, or $50 billion, waiting as “excess cash”.

Trustees said they were particularly concerned by regulatory uncertainty, considering it the main SMSF management challenge, while one-third of SMSF trustees plan to make, or are making, investments outside of super thanks to changing super regulations.

“Because of this it will be important for investors to ensure their entire portfolio (both inside and outside their SMSF) is aligned to their investment goals, in addition to keeping an eye on the tax efficiency of any investments made outside of super given they sit outside of the concessional tax structure,” Mr Bowerman said.

Most SMSFs don’t understand diversification: Investment manager
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