On 4 February 2015, Winston Capital Partners hosted a group of fund managers at Kingsley’s Steak house in Sydney to talk SMSF; and to bite into some of Australia’s finest grass-fed beef – incredibly one of them ordered Salmon! Leading the conversation was Andrew Inwood, the irrepressible and self assured principal of CoreData, along with his able assistant James Taylor. The following insights have been kindly provided by them.
Unlocking SMSF Cash
‘There is a mountain of cash sitting in self-managed superannuation funds (SMSFs) in Australia, with a large chunk of this ready to be released into Australian and international investment markets. The latest figures from the Australian Tax Office (ATO) show there is more than $AU150 billion of cash sitting in SMSFs, and the RBA has just tempted the sector to start moving this into more productive assets with a rate cut.
At CoreData, we have recently matched detailed data on more than 400 SMSF trustees’ funds, including individual assets and investment returns for 2013 and 2014, against the ATO’s own publicly available data and have found our data to be closely aligned. This allows us to apply some assumptions from our data to the wider SMSF sector.
Our research has shown that SMSFs are sitting on large amounts of cash, with 20.6% of all assets comprised of cash and term deposits. Three fifths (61.4%) of this is in savings accounts, with a further 30.8% in term deposits. There has been remarkably little change throughout 2013 to 2014 in SMSF cash holdings, with cash holdings decreasing by only 120 basis points during the period from 21.8%.
The large and stable cash holdings are largely driven by trustees wanting to reduce their risk. Recent CoreData research of more than 600 trustees revealed that reducing risk was the primary driver for holding cash for more than three in five respondents, considerably more than the quarter of respondents that were holding cash as an investment to access a guaranteed income stream.
The recent cut to the cash rate, along with expectations of further rate reductions in the next 12 months, indicate that trustees will begin to shift some of this cash into more productive asset classes, with CoreData’s research suggesting Australian equities, international equities and residential property will be the beneficiaries.
The interesting thing about SMSFs and Australian equities is that funds tend to be heavily concentrated at the top end of the market. The top 10 largest companies in the Australian market account for 57.2% of trustees’ equities investments, compared to 46.3% for the market in total, driven by a tendency to be overweight in the Big Four banks. As such, we can likely expect even more concentration to these shares in coming months.
Australian property is also set to see an influx of SMSF cash, as the third most popular destination to which to reallocate cash assets. However, this already makes up a significant proportion of SMSF portfolios at 24.5%.
The more interesting movements, albeit on a much smaller scale are likely to be seen in the managed fund and international equities sectors. The tendency to invest directly in large Australian companies has traditionally been driven by trustee’s investing in what they know best, so, when it comes to international markets they are more likely to defer to the experts, providing an opportunity for managed funds with international exposure to market themselves to trustees.
The mountain of SMSF cash provides an opportunity for many service providers. The key to unlocking it will depend on whether trustees continue to see high cash weightings as the best way to reduce their risk, or record low interest rates as the bigger risk.’
Note: Data used in this blog has been sourced from primary research undertaken by CoreData on SMSFs, along with the ATO. For further information please contact James Taylor at firstname.lastname@example.org or +612 9376 9600.
Winston is yet to be convinced that the SMSF market is actually a segment that can be addressed from a fund manager point of view, in the same way that the Industry Fund and IFA channels can be addressed – it is a tax structure advised by existing channels and accountants, with the latter (in the main), not being able to provide important investment advice post the establishment of those SMSFs.
We know that many SMSFs are established by existing channels in IFAs and Family Offices for example, which can be segmented and served as they currently are by fund managers. We also know that many SMSFs are established by small businesses in order to acquire their commercial properties in a tax effective environment – are these segments really in the market for managed funds? We also know that many people set up SMSFs on the advice of their trusted accountant relationship – call me cynical (I’ve been called worse) but fees would play a role here – which then sit dormant. And we also know that many have been keen to set up SMSFs to acquire direct residential property – aside from the media hyperbole, this approach represents a very small component of the SMSF sector, but if I had to sell newspapers, I would blow this out of proportion too.
So the accountant segment looks interesting, in terms of helping them assist their clients make smarter investment decisions once an SMSF has been established. Groups like CountPlus and AMP through their SMSF Advice brand are two examples of dealer groups who are well placed to service (and then sell products…) to the clients of these accountants. Time will tell.
Content is Queen (Why is it always King BTW?)…
If fund managers do not wish to engage through these traditional channels, then the direct to consumer approach is available, but this is not a cheap date, if advertising is the chosen path – Platinum, for example, spend ~$3m plus each year putting their brand out there for the public to consume. Managers can try smaller media experiments – maybe attacking their local area in print or Google/Facebook ad word campaigns but in this space, smaller managers are competing for clicks against the well resourced banks etc.
Another approach (less costly financially), is to develop a strong brand backed by relevant and interesting content that make senses to those self direct SMSF investors who are not currently served by advisers or accountants – the current exposure to global equities in the SMSF sector is illogically low for example, as supported by the CoreData information supplied above. Morphic recently wrote this report to address the issue of SMSFs being underweight global equities, which was picked up by the AFR’s Chanticleer – having spoken to Jack Lowenstein, Morphic’s CIO, this has resulted in flows. Building great content, will in time, attract journalist (print and TV) to seek comment in their papers and news channels, which is where a lot of SMSF investors seek their ‘advice.’ A number of studies have shown that self directed investors trust media outlets most, such as the Australian Financial Review or other newsletters such as Intelligent Investor or Eureka Report, who have recently done a JV with OneVue to provide a digital engagement experience called Brightday, to tackle the self directed segment. Having News Corp as your partner (owner of Eureka), does reduce the direct advertising expenditure pain by a large degree!
But not all fund managers are created equal in the eyes of the media – a manager that cannot communicate well in front of an audience, may struggle to get cut through with their intended market. Not everyone can be (or wishes to be!) Roger Montgomery from Montgomery Investment Management or Chris Joye from Smarter Money Investments – two rare birds who are at ease in front of the camera and who have used their profiles to successfully grow funds under management.
Critically, any fund manager wishing to engage the SMSF segment directly, has to ensure that fulfilment is seamless – it is great to have excellent content, but when an investor lands on a manager’s website, they need to be able to apply for units easily. To this end, the need for an online application process is paramount, given that most people hate paperwork. The mFund solution is a very good step in addressing this seamless application process (short form PDSs only), but without Commsec’s participation (who have about 50% of the SMSF market), it will take time for this market to take off.
It is easy to see how administration providers can segment the SMSF market, but it is not so easy for fund managers. We recommend that at this juncture, managers start down the content route, with a willingness to be open about sharing and imparting knowledge in a selfless manner – ultimately this will build trust with the SMSF self directed audience – this strategy can co-exist with the traditional approach to channel segmentation. The key with content, is to ensure that it is relevant, and then distributed across multiple media channels where those audiences are ready to listen. This includes Blogs, eNewsletters, syndication opportunities, Google+, LinkedIn, Twitter, YouTube (where video) and Facebook etc. And most importantly? Take a long term view!
Andrew Fairweather, Founding Partner