SMSF trustees are losing money by missing out on easily accessible investment opportunities.
I recently came across an article praising SMSF trustees for their good strategy to invest in the largest Australian companies. Is this a reasonable assessment or conclusion? We think not.
The reason is that there are many other sharemarket investment opportunities around the world that most SMSF trustees are missing out on. Ignoring overseas sharemarkets simply leads to lower returns and higher risk in the medium to long term. Or to put it another way, less family wealth!
SMSFs have a much skewed investment strategy. Direct Australian share investments account for 31% of all SMSF assets. The official statistics make it difficult to determine the allocation to managed Australian sharemarket funds. We estimate that an additional 4% to 8% of all assets can be added to the total Australian share allocation, bringing it to 35% to 39% of all SMSF assets.
The official statistics also make it difficult to determine SMSFs’ allocation to overseas sharemarkets. We estimate that the allocation is somewhere between 5% and 9% of all SMSF assets. Clearly there is much less invested in overseas sharemarkets than in the Australian sharemarket.
If you look at professionally-managed “balanced” investment funds/strategies (70% growth assets) you will see they have around 30% of assets invested in overseas sharemarkets. This allocation can even be higher than the allocation to the Australian sharemarket. A more equal allocation between Australian and overseas sharemarkets leads to a better diversified portfolio that leads to higher returns and lower risk in the long term.
So, are SMSF members missing out? The following chart suggests that they probably are.
The above figures are all per annum returns measured in $A terms i.e. what Australian investors would have earned after the currency effect, by investing in the index of these regions or markets. We have selected the above world sharemarket regions and countries to provide a relatively simple but representative picture of what has gone on with sharemarket returns around the world.
Last year, the 2016/17 financial year was a great year almost all around the world. Australian and the U.S. markets did very well but not as good as Japan and Europe and a long way behind Emerging Markets (China, India, Brazil plus 20 other countries). Of course, this is just one year.
Looking at the whole period over the last 5 years we can see what has happened during a strong period of recovery after the GFC. Again our Australian sharemarket has lagged most regions/ markets shown above. Compared to the U.S. sharemarket our market produced approximately 9% points lower returns each year. Over 5 years that is approximately 54%! (It is not 45% because of the effect of compound returns.) What does that mean in $ terms. In this case, for every $100,000 that an SMSF had invested in Australian shares and not in U.S. shares (as measured by returns from the overall market indexes) that would be $54,000.
The period over the last 10 years shows a very different picture with all the returns being much lower. This is due to large capital losses experienced in the GFC even after taking account of the recovery to June 2017. Our market has done quite well compared to most other regions but less than half as well as the U.S. market.
The above discussion has concentrated on regions and very large sharemarkets like the U.S. and Japan. You can get an even more interesting picture if you drill down into the smaller components of the bigger indexes e.g. the U.S. mid-size companies and smaller companies indexes. Investors can also look to invest specific countries e.g. China, India, Brazil and Mexico. Also available are index investments in sectors like technology, or industrials.
There is a huge range of easily accessible funds that track a country, a region or a worldwide sector of the world sharemarket.
Some people argue that it is easier to invest in Australia and we know what we are investing in. Some people say we do not know enough about overseas sharemarket investing. Good advice will overcome this obstacle. At InvestAstute we have been analysing and advising on Australian and overseas sharemarket investing for 30 years.
Warning. The above discussion is not a recommendation to invest based on the above figures or on any other basis. The purpose is to alert investors that there are many, many other equities investment opportunities besides the top 20 companies on the Australian sharemarket.
Nick Nedachin is the Managing Director at InvestAstute Pty Ltd. He can be contacted at firstname.lastname@example.org or on (02) 9929 5125