The newly released research, which surveyed 3000 investors and almost 200 of their advisers, shows the allocation now sits at 31 per cent of their portfolios, down from a high of 45 per cent in 2014 during the post-GFC bull run and the lowest level recorded since 2009. On the flipside, cash and cash-like holdings increased from 25 per cent to 27 per cent.
Certified financial planner Travis Schindler of Hewison Private Wealth says the strategy of selling down equity holdings during the early months of the coronavirus was “not wise at all”. In fact, he says bluntly that the strategy was “actually the worst possible course of action at that time”.
“An appropriate asset allocation strategy should have been in place before the March market sell-off with a playbook in place for what actions should be taken when such events occur,” Schindler adds.
“Direct equity holdings should have been reduced beforehand if it was not deemed appropriate for that investor’s individual goals and circumstances. Decisions like this should not be made in extreme market conditions.”
Instead of joining the herd in selling off, a more prudent strategy would have been to top up on quality direct equities instead, he says, especially in March and April.
“Although emotions could have dictated otherwise, sticking to a repeatable strategy of buying in down markets and taking profits during better times is how best to protect and accumulate wealth over the long term,” he advises.
To be fair, it should be pointed out that the majority of SMSF investors actually refrained from making changes to their portfolio in the wake of the pandemic.
Of the SMSFs analysed, 56 per cent indicated they did not make substantial changes – defined as greater than 10 per cent of the fund – to their mix of investments and assets over the 12-month period.
“It is in no way a majority who are selling off for cash,” Investment Trends’ Blomfield explains, adding that the changes made by SMSF investors over the period should not be considered “radical”.
Beyond this specific research, Vanguard Australia’s Robin Bowerman says that the passive investing pioneer has seen “net inflows” into exchange-traded funds (ETFs) over the period, and estimates that at least 50 per cent of that business came from SMSFs.
From his perspective, a good portion of the SMSF community were “not panicking” but instead viewing the volatility as an “opportunity to buy”, just as Schindler advises would have been wise.
The data does show, however, a marked increase in portfolio changes relative to recent years. While the 56 per cent making minimal changes was still the majority, it was the lowest level recorded in the 11-year history of the research.
The number of SMSFs making drastic changes to their portfolio of more than 50 per cent doubled from 4 per cent in 2019 to 8 per cent by May, the highest number on record and above the 6 per cent making asset mix changes in the aftermath of the GFC.
Though on the whole SMSFs reduced their exposure to volatile equity markets, they are still pinning their hopes on shares to save their portfolios as we come out of the downturn.
Asked about their intentions over the next three months, 37 per cent said they intended to increase their allocation to Australian shares, while just 6 per cent said they intended to decrease that exposure. Twenty-three per cent wanted to top up on international shares, with just 5 per cent planning to reduce global equity holdings.
‘Tip of the iceberg’
Interestingly, just 5 per cent said they planned to increase their exposure to fixed-income investments like corporate and government bonds, with the same number planning a decrease.
The findings indicate SMSFs are lukewarm at best about the fixed-income asset class. Yet at the same time they are increasingly realistic about the dwindling yields available to them via the sharemarket as once reliable companies like the big four banks pull the plug on crucial dividend payments.
Expectations of returns from Australian share dividends have fallen among SMSFs to just 3.1 per cent, down from the bullish hopes of 4.8 per cent in January before the pandemic.
The finding shows SMSFs are wise to the realities of the downturn. Yet experts are worried they are not choosing the right solution to that identified problem, planning to load up on riskier equities to chase yield, rather than introducing more fixed income to their portfolios.
“There is this view that growth assets will outperform in the long run – but that’s growth, not income – so we’re getting an answer that doesn’t really display a deep understanding of the role of fixed income within a portfolio,” says Blomfield. “It’s just not part of the strategic allocation.”
Schindler agrees the finding indicates a flawed approach. “Focusing on yield alone, particularly in the current historically low interest environment we are in, means investors are turning their back on a vital piece of their portfolio by looking through a lens which only allows them to see the tip of the iceberg,” he says.
They could be putting their capital at risk in exchange for what they blindly hope is higher income in the short term, even though they have also said they know that is less likely to come than in the past.
Reluctant to increase their allocation to what Blomfield calls “pure fixed income” like bonds, many SMSFs are trying to have their cake and eat it too by stocking up on hybrids – relatively complex financial products issued by companies and combining features of bonds and shares.
Jay Sivapalan, head of Australian fixed interest at Janus Henderson Investors, says he understands the thinking behind the hybrid exposure to some extent, but adds a stark warning.
“Hybrids as an individual security are not bad per se and can have their place in a portfolio,” he says. “But they are not defensive.”
They are lower down the capital structure and they have “non-viability clauses”, meaning that if something goes wrong, the hybrid holdings will be converted to shares, which could see investors lose out, he points out. “In short, they are closer to equities than fixed interest.”
Sivapalan says the data shows SMSFs continue to have a “bias” towards Australian shares and also direct property, holdings in which increased from 13 per cent to 16 per cent year-on-year.
“Shares, with a few bumps along the way, may have served them well in the past,” Sivapalan says. “However, events like COVID-19 are a timely reminder of the value of diversification and the role defensive assets play.”
Blomfield says there is likely a link between the lack of demand for and understanding of the more stable yield offered by fixed income and the dwindling habit of SMSFs seeking professional advice from a licensed financial planner.
The number of SMSFs advised by a planner fell from 215,000 to 190,000 year-on-year. At the same time, the majority of SMSFs (61 per cent) indicated a preference for free advice like government and investment newsletters over professional, paid advice.
The finding comes as the supply of professional financial planning services has declined. There were 22,334 registered financial advisers in Australia as at the end of June, according to research house Rainmaker Information, indicating a 16 per cent decline in the workforce over the past 12 months.
It also comes as the profession is rebuilding trust after the scathing findings of the Hayne royal commission, which lashed most of the biggest corporate providers of advice.
For Vanguard, there is an opportunity for that trajectory to turn around — one that may be in the interests of SMSF performance.
“As demand for low-cost, quality advice grows, financial planners are often assessed on their value-for-money proposition,” says Vanguard Australia head of intermediary Rebecca Pope.
“But aside from portfolio and financial outcomes, planners have an opportunity to define their value not just in monetary terms, but also in emotional outcomes.” In other words, in a volatile environment advice can help provide peace of mind not just contribute to investment returns.
Schindler agrees that some of the more negative aspects of the coronavirus report card on do-it-yourself investing could be easily turned around.
“A level head, confidence that a strategy is in place and professional support are imperative in extreme conditions,” he says. “Quality ongoing advice should provide this.”