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‘Just a little crazy’: SMSF retirees continue to shun fixed interest investments
When it comes to fixed interest, the numbers say it all. The latest asset allocation numbers for the balanced accounts of three of the country’s biggest superannuation funds, AustralianSuper, Australian Retirement Trust and HESTA, saw them holding 14.5 per cent, 14 per cent and 11.1 per cent, respectively, in fixed income.
In stark contrast, ATO figures show the self-managed super fund (SMSF) sector held just $9.6 billion in fixed interest securities or a miserly one per cent of the net asset pool of $896 billion at March 31, 2024. For SMSFs, it’s all about cash and term deposits when it comes to defensive assets, with $145 billion (16.2 per cent) of their net asset pool being held in this asset class.
SMSFs have never been comfortable with debt securities, be they corporate or government. Even when the cash rate plummeted to 0.10 per cent in November 2020 as a response to the COVID pandemic and stayed there until May 2022, SMSFs clung on to their cash holdings.
Today, with the cash rate at 4.35 per cent, no doubt self-funded retirees are feeling a little better about their portfolios. But as Bentham chief investment officer Richard Quin stresses, rates are likely to fall.
“We could get to a point where interest rates are below one per cent again. When that happened before, SMSFs were effectively getting nothing.”
Another option that some SMSFs have chosen is to chase higher yields via private credit where returns can be between eight per cent and as high as 12 per cent. But that comes with heightened risk, especially if the capital is funding property projects in the development phase.
It’s a risk, Quin tells The Golden Times, that older investors don’t need to sign up for. “I get it, self-funded retirees want income. But some of the risks we see them taking, well, it’s just a little crazy.”
As he points out, private credit managers don’t value their portfolios daily, and investors can’t redeem their money out as easily as they can with a traditional bond manger. “With us, it’s all designed for you to pull your money out at any time. You give your notification and in two days you’ve got your money at the current market value.”
Indeed, with riskier assets, such as equities, private equity or private credit, what’s often forgotten is what Quin calls the risk of ruin. “When you’re retired, and especially if you only have a moderate balance, you simply can’t afford to lose 40 per cent of your assets because you can’t rebuild that at this stage and maintain an income.
“So, it’s all about mitigating that risk. And then, if you look at the different yields available, funnily enough, right now, bond yields are high, and the credit spreads are tight. And within a bond portfolio, an investor can choose between more active and passive funds.”
The challenge for Bentham when pitching to the wholesale and retail markets is not so much that the bonds are a good investment story but that they are a viable investment option that SMSFs need to actively consider.
It will be an uphill battle. As Quin highlights, Australian investment portfolios compared with other portfolios globally are very overweight equities (at March 31, 2024, the average SMSF held 30.2 per cent in Australian equities).
“As much as anything it’s a historical thing, reflecting the profitability of the Australian equity market. It’s been through commodity booms, and it’s had an effective banking oligopoly – major drivers of equity returns.”
But that historical nexus could be tested. A faltering Chinese economy has the iron ore price under pressure (BHP and Rio Tinto are both down about 20 per cent this year), while lithium is proving to be more fool’s gold than the next mining El Dorado.
And while no one is suggesting a market challenge to the banking oligarchy, a major appeal of the banks as an investment option is their fully franked dividends. While the 2019 federal election took that issue off the table, there is a suspicion in some investment circles that budgetary and demographic changes could resurrect it as Gen X and millennials increasingly hold voting sway at the ballot box.
For fixed interest managers such as Bentham falling interest rates and an equity bear market could be just the opportunity their asset class needs. After all, SMSFs did miss the bus with the past two bond bull markets when interest rates fell. Whether they catch the next one could depend on just how well these bond managers can sell their story outside the institutional market.
