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SMSFs bump up their cash: why and what to do during a correction

By AMP Capital

According to the SuperConcepts’ SMSF Investment Patterns Survey June 2017, super funds held 20% of their funds in cash in 2017. This is compared to 18% as at 30 June 2016.

Self-managed super funds (SMSFs) are holding a greater proportion of their assets in cash, according to the latest data from super fund administrators SuperConcepts.

According to the SuperConcepts’ SMSF Investment Patterns Survey June 2017, super funds held 20% of their funds in cash in 2017. This is compared to 18% as at 30 June 2016.

So what does this say about SMSFs and what actions could they take with this cash should a share market correction produce buying opportunities?

AMP Financial Planner Mark Borg says time restraints are one reason why many SMSFs hold so much cash.

“Trustees plan to invest the money but invariably life gets in the way; this is particularly true for the self-employed,” he says.

Liam Shorte, a director and financial planner with Verante Financial Planning, says another reason so many SMSFs hold so much cash and term deposits is because they form such a substantial part of their defensive allocation.

“Retail and industry super funds would tend to allocate this part of their portfolio to domestic and international government bonds,” Shorte explains.

He says SMSFs can access retail interest rates on term deposits, which are better than those available to larger or industry investors.

For instance, at the moment an Australian five-year government bond pays a yield of 2.3%. Shorte says an SMSF investor can achieve 2.6% for a one-year, government guaranteed term deposit or 2.8% for two years.

“To invest in bonds it’s essential to understand technical aspects such as bond pricing, running yields and yield-to-maturity, as well as the volatility of bond prices. So many stick to term deposits for a simple approach to their defensive allocation.”

Shorte says this approach adds a degree of stability to their portfolio in terms of predictability of cash flow to meet their pension payment needs.

“But it may lead to a lower return from that part of their portfolio compared to a well-diversified bond portfolio. But this is meant to be their defensive allocation and many feel secure with the term deposits and happy to let the rest of their portfolio chase returns.”

Making the most of cash

Trustees should always be clear on their goals and have a plan in place to work towards them. Borg suggests trustees only keep in cash what they need for liquidity and then have the balance invested.

“Consider term deposits and cash management accounts rather than bank accounts to ensure the funds are earning as much as possible.”

Short advises only keeping a minimum amount in a cash account, says 2% to 5% of the portfolio, and place the rest of the cash allocation into high interest accounts like AMP Esaver, ING’s Business Optimiser, or Rabodirect’s Notice Savers for funds required within six to 12 months.

“Use a ladder of rolling term deposits to get the best rates for the remaining cash and start looking at a diversified bond fund that has a good long term track record. It’s an idea to begin to understand the terminology in the fixed interest/bond markets as an allocation to bonds can offer some downside protection when share markets are volatile,” he says.

Facing a correction

Corrections can offer buying opportunities for quality investments. But waiting for one comes with opportunity cost.

“Some corrections can last a few weeks while others can go for years, as in the case of Japan. Newton’s third law of motion – what goes up must come down – does not apply to investment markets,” says Borg.

“Typically markets move for a reason and this, together with the opportunity and the member’s appetite for risk, should be assessed before making any investment,” he says.

On the other hand, Shorte says don’t be afraid in a correction to pick up blue chip stocks at depressed prices.

“We would all love to have picked up CBA at less than $30 after the GFC or Telstra at below $2.70 but many did not have a war chest of cash to take advantage of the opportunity.”

He says if trustees are not confident investing when markets are volatile it’s an idea to look into real return or dynamic market funds.

Says Shorte: “above all monitor your asset allocation and stick within your target allocations to avoid taking on more risk that you are prepared to handle.”

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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