Sustainable, growing returns can be challenging in an environment where interest rates are low and growth is only just starting to pick up. Here a SMSF specialist adviser shares tips for SMSFs looking to drive returns in 2018.
Self-managed super fund (SMSF) trustees are always seeking sustainable, growing returns for members. That can be challenging in an environment in which interest rates are low and growth is just starting to pick up globally. So here are some ideas to help drive your fund’s performance this year.
Hearn is an AMP financial planner and a SMSF Specialist Adviser™ who believes there are plenty of ways for trustees to drive returns in 2018.
“Looking at the market cycle, traditional blue-chip stocks are a focus for many clients as they will continue to drive income through steady dividends. But trustees should also ensure they have a diversified portfolio that includes mid-cap and small-cap stocks outside the top 100 shares on the All Ordinaries Index,” says Hearn.
When investing in fixed interest, Hearn’s advice is to be judicious when assessing the potential for different investments in this class to generate a return.
Fixed interest assets include corporate debt, term deposits and cash-based investments, returns from some of which are muted in this low interest rate environment.
“The bond market has been giving reasonable returns, in some cases double that of term deposits. However, if interest rates rise, bond yields do as well and investors need to be careful to avoid losing capital in the defensive part of their portfolio when this happens,” he adds.
Additionally, he cautions SMSF trustees considering investing in private non-bank mortgages to parties who are not members of the fund or related parties. While this type of private lending may promise returns much higher than terms deposits, they also carry significant risk as the borrower has opted to avoid lending from a bank or has been declined. This is especially important in a rising interest rate environment in which mortgage defaults are likely to increase.
Asset class considerations
Although the Australian market has produced strong returns recently, overseas markets are likely to drive portfolio returns and growth this year.
“Look for international companies in the technology, alternative and renewable energy and artificial intelligence sectors,” Hearn advises.
Global infrastructure is also another area for trustees to consider. The US in particular is embarking on large infrastructure projects across the country to replace bridges, roads and utilities.
“Look to invest in countries with a long infrastructure pipeline, with relatively sound medium-term economic growth,” he adds.
When it comes to any investment, SMSF trustees should be aware about how the asset is positioned in its cycle and the risk taken to obtain the return.
“Focus on good quality returns year-on-year,” Hearn says.
Being risk aware
It’s essential for SMSF trustees to thoroughly assess the risks in their portfolio to drive investment returns.
Hearn says residential real estate is a particular area of concern. “When you crunch the numbers, the after-tax, after-fee return on investment properties are, unfortunately, quite low.”
SMSF trustees considering investing in property must factor in rising interest rates and the turning property cycle when considering this asset class.Like many investors, Hearn’s clients have been interested in cryptocurrencies.
“Love it or hate it, cryptocurrencies are all the rage. While their initial intention was to serve as a medium for exchanging cash for services, their use has deviated significantly away from their original purpose. We have seen large gains in values but it's early days, and the market is very volatile due to intense speculation,” he notes.
“It’s important to remember cryptocurrencies are not regulated by governments or restricted by the financial controls inherent in currencies like the Australian and US dollars.”
Generally financial advisers would not recommend SMSFs invest in cryptocurrencies. Additionally, most trust deeds would need to be amended to allow an investment in Bitcoin and its ilk.
“Trustees interested in this asset class must think through what it really means for their portfolios. It all goes back to the risk you are taking to achieve the required return for the fund. From that perspective, cryptocurrencies carry quite significant risk. It’s also important to genuinely understand them. Reconsider investing in anything you don't understand,” Hearn says.
Finally, it's always important for SMSF trustees to review their investment strategy each year to ensure the assets in the fund can still achieve the members’ required return to meet their retirement objective.
The investment strategy should set out the fund’s return objectives and trustees must stay abreast of how assets are tracking against it. It’s easy for this to be deprioritised in the overall management of the fund.
So, now’s the time of year to review the fund’s investment strategy and make any essential tweaks to ensure the fund remains on track to achieve its target returns.
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