Portfolio diversification might be top of mind for many self-managed superannuation fund trustees, but recent research shows that the basic tenets of portfolio diversification might be broadly misunderstood.
It’s the penchant SMSF trustees have for direct shares, and in particular their long running love affair with Australian equities, which may have warped this group’s idea of what it takes to be genuinely diversified, the research draws out.
Individual direct shares make up the largest portion of SMSF portfolios – 30 per cent of the total investments for SMSF trustees 65 years and older. This compared to cash and cash product allocations (25 per cent) and managed funds (10 per cent). These allocation estimates are based on data collected by Investment Trends on behalf of AMP Capital in the AMP Capital SMSF Survey which surveyed more than 650 SMSF trustees and which is broadly in line with quarterly data collected by the Australian Tax Office.
SMSF trustees want to be diversified or are at least thinking about diversification – nearly a third of those surveyed said they increased their exposure to diversification in the last 12 months to reduce risk in their portfolio, and a further quarter of these trustees intend to invest in the next 12 months for this purpose.
However, the research shows, trustees may be somewhat misguided in what they define as diversification or what they consider a well-diversified portfolio to be.
Almost half of the SMSF trustees surveyed consider a portfolio invested in 20 individual stocks to be well-diversified. Indeed, these SMSFs consider this to be more diversified than a portfolio holding only ETFs which would have allocations to many more stocks or a portfolio with four or more asset classes which would actually reduce portfolio risk.
Direct shares bias
Because of SMSFs trustees historic preference for owning direct shares, diversification between sectors appears more important for this group than between asset classes, even though diversification between asset classes is typically how professional asset allocators address correlation risk.
The top way they achieve diversification is by investing in different sectors, the research shows.
SMSF trustees who consider their funds to be “well diversified” do have relatively better diversification across asset classes than trustees who say they’re “somewhat” or “not at all diversified”, however even these self-proclaimed well diversified funds still have concentration risk concerns.
Those who say they are well diversified tend to have lower allocations to direct shares than the typical SMSF and more allocated to managed funds.
Meanwhile, as expected, portfolio risk in funds considered by their trustees to be poorly diversified is high.
Around four in five (84 per cent) of the trustees who consider their SMSFs to be ‘not at all diversified’ hold more than half of their portfolio in one asset type.
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.
This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.