It would seem a marriage made in heaven. An Australia thirsty for infrastructure capital and SMSF trustees looking for investments offering a healthy yield at a time of record low interest rates with less volatility than either property or equities.
Research shows a majority of trustees think long term when making their investment decisions. An asset class that falls between cash/government bonds and property/equities in terms of risk profile and offering yields above the cash rate would have appeal to the more than one million people who are SMSF trustees and members. In particular, those in the retirement phase, where income is a priority, would welcome access to this asset class.
The reality is, however, that SMSFs are effectively shut out from direct infrastructure investment – a potential $590 billion in funds under management can’t find a direct infrastructure home.
Massive demand for infrastructure
There can be no debate that Australia’s infrastructure needs could sorely do with this capital. Like all developed countries, Australia needs to both replenish its existing infrastructure and invest in new stock as our population grows rapidly. It is estimated Australia’s population will reach 30 million people by 2030, and that number will require an infrastructure spend of at least $350 billion in the next decade, according to the Australian Council of Learned Academics.
Politicians of all shades have recognised this need. Former Prime Minister Tony Abbott wanted to be known as the “Infrastructure Prime Minister”. His successor, Malcolm Turnbull, appointed a Minister for Cities, recognising that much of the spending will need to be in the major cities, particularly Sydney, Melbourne, Brisbane and Perth, where the combined population is expected to reach 18 million by 2030. Motorists in these cities today will relate horror stories about road congestion; imagine how much worse it will be if the issue is ignored and populations grow at these projected rates.
It’s not just traffic congestion. Water, rail (urban and inter-city), energy and telecommunications, ports (air and sea) will all require investment if Australia is to have a fully-productive economy. But infrastructure comes with a hefty price tag, and governments of all persuasions face budgetary restraints. In this fiscal environment, the $2 trillion superannuation pool is an obvious source of capital.
Barriers to SMSF investment
To date only some of the larger funds have invested directly in this asset class. At 30 June 2015, the APRA-regulated funds had $54.8 billion (4% of their total FUM) invested in Australian and overseas infrastructure. Of this figure, two superannuation sectors, industry funds and public sector funds, dominate with $45.8 billion (84%). But clearly more capital is needed, and the $590 billion SMSF sector seems an obvious choice.
Currently most super funds invest in infrastructure programmes that require capital exceeding $500 million, but SMSFs are perfectly placed to invest in smaller infrastructure projects (i.e. $100 million or less), which have funding structured appropriately for them.
But it is extremely difficult for SMSFs to invest directly in infrastructure. The reasons are many but four stand out:
- high dollar entry point
- illiquidity of the asset
- hefty entry and ongoing management fees
- lack of strong government backing for this initiative.
So why haven’t governments (and the industry for that matter) devised solutions to allow SMSFs to invest in infrastructure. It surely can’t be that governments believe the investment acumen needed for this asset class is beyond SMSF trustees. The evidence is overwhelming that they are smart investors.
A Commsec report issued in late 2015 showed SMSF trustees were early buyers when the share market dropped. A recent ATO report said:
“Changes in the composition of SMSF asset portfolios show the ability of (trustees) to adjust to changing circumstances and economic conditions.”
In recent times, trustees have shown a growing appetite for ETFs and overseas shares (typically via managed funds) as they diversify away from their traditional investments in blue-chip Australian equities, cash and property.
What needs to be done?
The problem is far from insurmountable, as the SMSF Association outlined in its submission to the Financial System Inquiry (FSI), before the Senate Economics Committee, and to the Federal Government and other relevant stakeholders.
The options we canvassed included offering unitised investments in smaller parcels (our figure was $25,000) or issuing small-scale infrastructure bonds. If these options were adopted, then the issue of risk would have to be addressed. While investment in brownfield infrastructure does offer a degree of security, the same cannot be said of greenfield projects (think BrisConnect and the Lane Cove tunnel). A government guarantee or support might be part of the investment equation.
Liquidity is an issue that will demand answers from trustees with a secondary market probably the most viable option. Trustees, especially those in the retirement phase, will want to be able to trade their investments if their financial circumstances change. But although they will want this option, their investment history shows they are ‘sticky’ investors who take investment decisions based on the long term. Liquidity is not just an issue for SMSFs, with the APRA-regulated funds also raising the topic in their submissions to the FSI.
Those who argue managed funds offer infrastructure assets for the retail market must accept this is only part of the solution. It overlooks the fact that trustees prefer to invest directly. Losses incurred by managed funds in the wake of the GFC left trustees wary about this investment structure.
Politicians and the industry need to bring some ingenuity to this issue, because it is hard to see the downside. SMSF trustees want yield, and have the investment acumen to understand this asset class. On the other side of the ledger, Australia needs capital for infrastructure, and to effectively exclude a $590 billion pool seems short-sighted, to say the least. It’s an issue the incoming government must address and engage on with the industry.
Andrea Slattery is Chief Executive Officer and Managing Director of the SMSF Association.