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30 years on, five charts show SMSF progress

Friday next week, 1 July 2022, is the 30th anniversary of the introduction of the Superannuation Guarantee (SG), initially set at 3%, which lifted forever the importance of Australia's retirement savings. It required employers to make contributions into a super fund for their employees. At the time, the total super system held about $148 billion from prior schemes, and the SG rate rose to 9% within a decade. On the 30th anniversary, SG rises to 10.5% on its way to 12% by 2025.

As the table shows, super balances have reached $3.4 trillion, with industry funds holding the largest segment at about $1.1 trillion. Next are the 1.1 million SMSF trustees with about $900 billion.

Let's mark the 30th anniversary of SG by taking a closer look at what SMSF trustees are doing.

Former Prime Minister and Treasurer, Paul Keating, wrote in an article in 2013:

"When we laid the foundations for the current superannuation system in the 1991 Budget, I never expected Self Managed Super Funds (SMSFs) to become the largest segment of super. They were almost an afterthought added to the legislation as a replacement for defined benefit schemes."

A surge in new SMSF establishments

SMSFs have come a long way, although it has not been straight line. New establishments peaked at 43,000 in 2012 and seemed to be falling steadily each year to reach a nadir in 2019 of barely 21,000. However, in the last couple of years, some fascinating changes suggest a resurgence in SMSFs.

Not only are fewer SMSFs being wound up (10,000 in 2021 versus 23,000 in 2017), but a cohort of younger and more engaged trustees are choosing SMSFs with confidence in their own investment decisions.

The Vanguard/Investment Trends 2022 SMSF Report was conducted between March and April 2022. The main reason for establishing an SMSF remains constant – the desire for more control over investments – but the average age at establishment has fallen from 51 years between 2006 and 2014 to 46 years between 2020 and 2022.

There has been a dramatic decline in people relying on their accountant to suggest an SMSF, and a rapid rise in word-of-mouth (friend or colleague), internet research or self-initiated. We know thousands of new investors made their first stock trades during the pandemic, and many also set up an SMSF. 

'Buy and hold' versus trading

Even among SMSF trustees who say their main motivation is control of their investments, a high 79% either agree or strongly agree that they take a ‘buy and hold’ approach to investing. Only about 28% agree or strongly agree that they trade actively, while only 29% agree or strongly agree that they continuously rebalance their portfolios.

In something of a disconnect, a lower proportion at 71% of those trustees who did not establish their SMSF for greater control either agree or strongly agree that they 'buy and hold'. Either way, actively trading and continuously rebalancing is a minority of trustees. Perhaps they have understood the message about taking a long-term view to asset allocation.

In reporting the results, Balaji Gopal of Vanguard said:

“It is normal to want an investment portfolio to consistently deliver better outcomes than the market averages, but as history tells us, it is much harder than we think. Over time what we see is that those who choose to invest in a well-diversified portfolio, using the time-tested principle of investing to capture market gains over the long term are the ones who are more likely to achieve their financial goals without needing to adopt a riskier investment strategy in this low yield environment.”

Asset allocation, inside and outside their SMSF

Consistent with surveys in previous years, SMSFs allocate more than half of their portfolio to direct shares and cash, with the number of direct shares increasing according to age. Trustees who are 65 and over hold a median of 19 companies in their SMSF portfolio while those aged 44 and under hold only seven.

Although market commentary places significant emphasis on the growth of Exchange Traded Fund (ETFs), they comprise only about 5% of total SMSF balances, a percentage which has not changed much over time. Managed funds remain consistently higher at about 10%.

Showing the popularity of holding business premises in the SMSF by professions such as doctors and dentists, commercial and business property comprise about 6% of assets, while residential commands around 9%.

Here is the most striking difference between investments held inside and outside super. This survey was the first to ask SMSF trustees about investments outside their SMSF, and the chart below shows inside SMSF on the left-hand side and outside SMSF on the right-hand side, based on the size of the investments.

It shows the high extent to which investment property is held outside the SMSF structure. This is probably motivated by easier borrowing conditions for individuals versus SMSFs, and a desire to negatively gear against higher personal marginal tax rates than in super.

The future for SMSFs is bright

Over 30 years, SMSFs have gone from a seemingly inconsequential stoke of Paul Keating's fountain pen to the mainstay of retirement planning for over one million Australians. Far from becoming a relic of older generations, SMSFs are actively used by younger people who are confident taking control of their own superannuation.

 

Graham Hand is Editor-At-Large for Firstlinks. This article is general information and does not consider the circumstances of any investor. The charts are reproduced with the permission of Investment Trends and Vanguard.

Vanguard Australia is a sponsor of Firstlinks. For more articles and papers by Vanguard, please click here.

 

9 Comments
Ian Parker
June 26, 2022

Graham, Interesting data, but it would be useful to see your definitions of the investment categories. I cannot see bonds in the list, but I would be unwise to consider all our corporate bond holdings to be "cash products" as not all of them are investment grade and not all of them are highly liquid. Where do they fit? Are we an outlier in having a significant percentage in corporate bonds?

Graham Hand
June 27, 2022

Hi Ian, I agree, we should see bonds identified in the data. Corporate bonds should not be grouped with 'cash and cash products'. I have raised this with Investment Trends and they have promised to consider.

Peter
June 26, 2022

Couldn't agree more, Daryl Lee.
Your last sentence sums up my strategy and has done for many years.
As Buffet says: "be fearful when others are greedy and greedy when others are fearful".

Kevin
June 24, 2022

I agree with you Daryl,it's only a paper loss ( but real),and it's only a paper gain ( but real).The bit you missed was the dividend income,as we enter the new tax year I am expecting a rise in income over the year,but there is a chance of a slight decrease.
I would doubt an atomic bomb could blow me off the course of the decades long plan.
A cup of coffee and a Tim Tam is a good financial plan.Now,which music to listen to.
When the weather warms up a cold beer under the money tree that was planted as a seedling so long ago .

George
June 23, 2022

I always questioned why people focussed on SMSF investments when so much is held outside super by SMSF trustees, it was only giving a fraction of the picture. Must look at all investible assets, which super funds cannot do.

Trevor
June 23, 2022

George...regardless of WHERE those assets are located , this latest "financial plunge" [ "crash" ] has made fools of us all !

Daryl Lee
June 23, 2022

Hasn’t made a fool of me. This will be my third “Crash” But, you Only lose if you sell. On the two previous occasions (HFC & Covid) I recovered my potentially significant Six Figure losses to go even higher. This time will be no different. Just gotta weather the storm and buy even more at bargain basement prices!

Kevin
June 27, 2022

Nah Trevor,get it roughly right,roughly most of the time and the results can be astounding.
Again using CBA as I have held it from day 1.Starts off small,but a 30% paper loss is still a loss if you sell. Over time it grows .CBA topped at $34 ish by 2002.I think a Dutch pension fund was playing with the share price,it jumped on the last day of the financial year.The tech wreck aftermath perhaps took it down to $23. I bought more,I missed bottom by about 10 cents I think.I'm a legend.CBA topped @ $62 before the GFC.That took it down to $26.I bought a few as it went down,I missed the capital raising at roughly $ 26,I had no money.My money was spent on the Wesfarmers capital raising @$28.I missed the second Wesfarmers raising @$14 as things got really rough.Would I have bought both of them if I had money,I don't know,the choice was taken away from me by the actions I took during that period.History teaches you what to do..The difficulty is picking bottom,or just get it roughly right .Close enough is good enough.
CBA topped at $96 in 2015 ish,I have no idea why it went up that high along with the other banks.They crashed to around $$68 I think .I got in at around $71 on the way down.They went up to $112 ish.I bought more in Feb of this year at 92 or $93,purely for the income.Time is no longer on my side.
I had retired from buying shares or even looking at prices.Graham puts out a podcast,APA is mentioned.I've heard of them,hang on ,I own them.I hadn't realised the price had gone down to $8.50 ish.I'll buy some of them.That got the adrenaline flowing again ( Graham you $#@&5+).If I hadn't heard that podcast I would never have bought more APA,I would never have bought more CBA ,the adrenaline would never have flowed again.
I've got the adrenalin under control again,perhaps.Back to having a cup of coffee and a Tim Tam
Just try to get it roughly right roughly most of the time.The stock market will be there for the whole of your life.The endless opinions will be there for the whole of your life.Only you can choose what to do and what you want to believe.

Kevin
June 27, 2022

I should add that during long periods of doing nothing excess income still goes into dividend reinvestment plans .It would also be very unusual for me not to take part in capital raisings.

 

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