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SMSF asset allocation review

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					       Aligning SMSF investor needs
       to their asset allocation




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           Aligning SMSF investor needs
           to their asset allocation

            SMSFs represent significant opportunity for advisers
             due to low awareness of legislation & investment
             issues
            The Super System Review identified concerns
             relating to asset allocation of SMSFs
            Found SMSF investors have concentrated portfolios
            Many SMSFs maintain the same asset allocation
             strategy for accumulation & decumulation periods,
             regardless of the change in investor needs



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           A real opportunity


            69% of SMSF trustees said they had a good
             understanding of their obligations
            Yet only 51% of SMSF investors said they were the
             trustee
            When asked if contribution limits apply to SMSF
             contributions, 37% were unsure and 30% said no
            30% could not explain the ‘sole purpose test’
            97% seek advice to set up an SMSF, but only 52%
             seek advice on their investment strategy

           Source: SMSF insights, CPA, Nov 09

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           What do SMSF clients want from their fund?
           Q. What are your top 3 priorities when selecting investments for your SMSF? (Multiple responses permitted)




           Source: Investment Trends 2009 SMSF Investor Report


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           What SMSF investors are getting,
              is far from what they want
                       - or need…




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       Accumulation phase insights
       and strategies




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           60% of SMSF assets in Aust shares & cash

                                                                   Overseas
                                                                                       Misc
                                                                   invstmts
                                           Mgd funds                                   3.3%
                                                                     0.8%
                                             5.8%


                                  Trusts
                                  16.5%
                                                                                                              Aust shares
                                                                                                                33.5%


                      Direct property                                                                        60%
                          12.5%


                                    Fixed interest                                                 Cash
                                        1.3%                                                       26.4%
           Average asset allocation of SMSFs. Source; A Statistical Summary of Self-managed superannuation funds. Review into the Governance,
           Efficiency, Structure and Operations of Australia’s Superannuation System. Table A: SMSF asset allocation percentage 2008. Australian
           Government 2009.

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           Very little exposure to overseas assets

                                                                   Overseas
                                                                                       Misc
                                                                   invstmts
                                           Mgd funds                                   3.3%
                                                                     0.8%
                                             5.8%


                                  Trusts
                                  16.5%
                                                                                                              Aust shares
                                                                                                                33.5%


                      Direct property
                          12.5%


                                    Fixed interest                                                 Cash
                                        1.3%                                                       26.4%
           Average asset allocation of SMSFs. Source; A Statistical Summary of Self-managed superannuation funds. Review into the Governance,
           Efficiency, Structure and Operations of Australia’s Superannuation System. Table A: SMSF asset allocation percentage 2008. Australian
           Government 2009.

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           High asset concentration in SMSFs


                    Asset concentration                                 Proportion of SMSFs
                             %                                                   %
                            100                                                  20
                            90                                                   34
                            80                                                   47
                            70                                                   61
                            60                                                   76
                            50                                                   91
                An asset concentration of 100% indicates all assets are held within a particular asset class




           A Statistical Summary of Self-managed superannuation funds. Review into the Governance, Efficiency, Structure and Operations of Australia’s
           Superannuation System. Table 21: 2008 asset allocation. Australian Government 2009.

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        Accumulation: How to get from A to B


                A. SMSF asset allocation
                                   Overseas
                                   invstmts    Misc
                                                                    Review portfolio/risk-
                                     0.9%
                       Mgd funds
                                               3.4%                 tolerance levels
                         5.3%

                                                      Aust shares   Divest under-performing
             Trusts                                     32.7%       or over-weight stocks
             15.9%

                                                                    Increase diversification
                                                                    through mgd
                                                                    funds/ETFs
             Direct
            property
             14.0%

               Fixed interest
                   1.0%
                                              Cash
                                              26.8%




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        Accumulation: How to get from A to B


                A. SMSF asset allocation
                                   Overseas
                                   invstmts    Misc
                                     0.9%      3.4%
                       Mgd funds
                         5.3%

                                                      Aust shares
             Trusts                                     32.7%
             15.9%




             Direct                                                 Set maximum cash
            property
             14.0%                                                  position for fund
               Fixed interest                                       Reallocate contributions
                   1.0%
                                              Cash                  into other asset classes
                                              26.8%
                                                                    Take advantage of
                                                                    tactical opportunities


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        Accumulation: How to get from A to B


                A. SMSF asset allocation                            Explain benefits of
                                                                    overseas exposure
                                   Overseas
                                   invstmts    Misc                 Well-managed,
                                     0.9%      3.4%
                       Mgd funds                                    diversified funds options
                         5.3%
                                                                    include Russell Global
                                                      Aust shares
             Trusts                                     32.7%       Opps, Emerging
             15.9%                                                  Markets



             Direct
            property
             14.0%

               Fixed interest
                   1.0%
                                              Cash
                                              26.8%




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       Decumulation phase insights
       and strategies




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        AA in accumulation & decumulation similar…

                          Accumulation phase                                                 Decumulation phase
                                      Overseas                                                           Overseas
                                      invstmts    Misc                                                   invstmts    Misc
                                        0.9%      3.4%                                                     0.7%      3.0%
                          Mgd funds                                                          Mgd funds
                            5.3%                                                               6.5%

                                                           Aust shares                                                        Aust shares
                Trusts                                       32.7%                 Trusts                                       35.8%
                15.9%                                                              17.1%




                Direct                                                             Direct
               property                                                           property
                14.0%                                                               10%

                   Fixed interest                                                     Fixed interest
                       1.0%                                                               1.7%
                                                 Cash                                                               Cash
                                                 26.8%                                                              25.2%




        Asset allocation of accumulation members and pension members in SMSFs. Source: A Statistical Summary of Self-managed superannuation
        funds. Review into the Governance, Efficiency, Structure and Operations of Australia’s Superannuation System. Table 20 2008: SMSF Asset
        allocations by SMSFs in accumulation and decumulation. Australian Government 2009.

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        …but needs significantly different

            Attribute                                      Accumulation                                   Decumulation

            Time horizon                                   Known, controllable                            Unknown, uncontrollable

            Investment goal                                Future wealth                                  Ongoing cashflow
                                                                                                          Future wealth/bequest
            Risk measure                                   Variability in wealth                          Sustainability of cash flows
                                                                                                          Variability in wealth
            Cashflow                                       Steady contributions                           Steady withdrawals

            Timing of returns                              Dollar cost averaging generally                Returns in early years have greater
                                                           beneficial                                     effect than later years
            Inflation                                      Seek growth in excess of inflation             Protect purchasing power




                             Retirement date becomes ‘transition date’


            Source: The fundamental differences in accumulation and decumulation, Richard K Fullmer, Senior Research Analyst, Russell Investments

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        The advantages of staying invested in
        retirement – the ’10/30/60 rule’




        Assumes: investment return at 7.8% p.a., salary growth of 4.75% p.a. and income stream indexed at 3% p.a. Calculations assume 40 years of
        employment then payments for 25 years in retirement. Based on analysis by Matt Smith, Russell Investments.


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        When do investors become ‘decumulators’


         Cash flow is more important than wealth
             Low opportunity/desire to earn income from work
             High reliance on savings to fund living costs
             Drawdown rate on assets is higher
             Cash flow needs to last for longer period
             Assets primarily for retirement expenditure




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        Framework to simplify investment strategy
        decisions

         Deal with unknown time horizon
         Balance conflicting objectives
             Adequate, sustainable income vs desire to leave bequest

         Keep pace with inflation
         Adapt to changing circumstances
             Market falls reducing assets
             Market gains fuelling expectations
             Unexpected expenditures



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        Three distinct pools of capital

                                                                            Investment Strategy

                                 The Essentials bucket                      Conservative portfolio with tax
                   E             Funds the essential, tolerable lifestyle   aware income options




                                 The Lifestyle bucket                       Dynamic growth strategies with
                    L            Funds your desired lifestyle               an income option.




                                                                            Dependent on investor risk
                                 The Estate bucket
                   E                                                        tolerance/capital growth
                                 All the additional money you have          requirement and estate planning.



        Source: Don Ezra, Planning to Decumulate


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        Asset allocation should be at the heart of an
        investor’s SMSF needs

         Discuss life stages, ‘transition date’, goals & needs
         Critically asses existing asset allocation
         Determine steps to redistribute assets
         Discuss benefits of professionally managed funds




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posted:10/5/2011
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