by Olivia Long

In all my time in the SMSF industry, I have yet to find a trustee who has had a flippant attitude about their superannuation. People – typically a husband and wife – decide to set up an SMSF after serious deliberation; it’s rarely a spur-of-the moment decision.

When you consider their backgrounds that’s hardly surprising, with a solid majority coming from the ranks of professionals, farmers, and small business people. These are people who are used to making financial decisions, often tough financial decisions. So taking responsibility for their retirement savings is often the next logical step in their financial walk through life.

In saying this, there are two caveats. First, they often need professional advice, especially on the investment and administration fronts, and, second, some find the time and commitment needed to run an SMSF simply too demanding. With my blessing, they head back to the bosom of an APRA-regulated fund where the “experts” assume all responsibility.

As Australian Taxation Office (ATO) figures show, and as I have discussed in this column before, those deciding to the leave the ranks of the SMSFs are a minority. For the majority that stay, running their SMSF is a serious business. (Again, ATO figures show only a miniscule number are non-compliant.)

So I am always amused when the big end of town, the professional investors, whether they be fund managers or superannuation funds, often deride the investment capability of trustees.
 
In recent weeks, with the Australian sharemarket under pressure, the talk has all been about trustees being overweight in Australian equities; in particular, trustees’ penchant for the big four banks with their fully franked dividends have attracted a lot of criticism.

That’s an interesting comment; overweight in equities. It was not so long ago we were being told SMSFs were holding too much cash and fixed deposits. Here we were, in a strong equities market, and all these SMSF 'amateurs' were holding on to cash.   

What if the Financial System Inquiry recommends – and the Government agrees – that the banks have to hold more capital, or the abolition of franking credits is mooted? What will do for the banks’ share prices? Well, the same question could be levelled at the APRA-regulated funds which, I suspect, are very much in the same boat. But somehow they escape criticism.

The other asset class where SMSF trustees often attract criticism is residential property investment. Although it’s been rising (as has the use of gearing), both this asset class and limited recourse borrowing arrangements still account for a tiny percentage of the total SMSF asset pool of about $560 billion.

It’s my observation these critics, many of whom have a vested interest, use a change in market sentiment to assert that SMSFs have the wrong asset allocation.  Well, perhaps they are right but what it ignores is some hard data that’s in the public arena: APRA figures show that SMSFs, on average, outperform APRA-regulated funds when markets are struggling (thanks to cash) and match their performance when markets are rising.

There’s also that piece of research by Rice Warner earlier this year that showed over the eight-year period from 2005 to 2012, the SMSF sector outperformed the rest of the superannuation industry in six of those eight years. Those were tough times, including that global hiccup we now refer to as the GFC.

It’s my firm belief that trustees get it largely right – either with or without professional advice. After all, most have been making financial decisions all their working lives. Why would they wait until they have to make what’s arguably their most important financial decision – their retirement income – to suddenly get it wrong?