Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 359

Is it the end of cash for SMSFs?

Falling SMSF cash balances over the past five years are tipped to accelerate on the back of new COVID-19 challenges, as interest rates look set to stay lower for longer.

These interest rate declines dominated the headlines for SMSFs during 2018 and 2019, as many trustees reconsidered their investment strategies. The average SMSF reduced its cash balance by 6% in the five years prior, according to the September 2019 data from the Australian Tax office. SMSFs are certainly looking for alternatives.

Challenges for SMSF portfolios

Then came COVID-19 and its associated challenges, including falling share dividends and uncertain property and rental markets. This has placed further strain on SMSF cash flows and is expected to lead to a wave of diversification as trustees seek to prop up reduced cash flows.

In the recent company reporting season, SMSFs were hard hit by announcements from Australia’s big four banks that dividends were being reduced or suspended – a move that is expected to be mirrored in other key industries including airlines, hospitality and tourism.

Historically, the strong dividend programs of Australia’s blue-chip companies have proved lucrative for SMSFs, reducing the incentive to consider other investment avenues. Unfortunately, it has also led to portfolios being too concentrated and subject to shock from unforeseen events.

Continued market volatility coupled with the flow-on effects of COVID-19 and rock bottom interest rates has Australia’s wealthiest SMSF investors actively seeking opportunities outside of the traditional asset classes.

When savvy SMSF investors consider how they want their portfolio to perform, they don’t just think about returns. A key consideration is the ability to be able to withstand unexpected market events.

Why are SMSF investors turning to fixed income?

We have noticed an increase in SMSFs wanting to lock in returns and reduce risk. These factors are driving a renewed focus on income options like corporate bonds and tailored investments, which offer investors access to equities in a structure that can reduce risk, and which provide an agreed rate of income upfront.

During the first quarter of 2020, we saw a 44% year-on-year increase in bond transactions and a 73% increase in tailored investment transactions. 

(Tailored investments are also known as structured products, as they typically pair a bond and a share or basket of shares to form an income-bearing product with exposure to equity markets).

SMSFs have traditionally been underweight in fixed income, although it tends to be more resilient during times of market volatility. Adding fixed income to an equity portfolio can reduce the unpredictability in portfolio returns without overly hindering performance.

It is also a source of reliable income, because interest payments are guaranteed by the issuer and paid regularly – assuming the company doesn't default. Our clients focus on investment grade local and global companies, with strong balance sheets and a track record of performance and risk management.

Foreign currency and risk management

Another key trend we have observed is a significant increase in foreign exchange transactions, up 77% in the first-quarter 2020 versus the same period last year.

This foreign exchange movement has primarily been into US dollars, for the following reasons:

  • to take advantage of the currency's safe haven status,
  • a belief that the recent Australian dollar rally may not be sustained as long as uncertainty remains the norm.

For SMSFs, investing outside of Australian-denominated assets has not been a widely-utilised strategy. However, investors who hold positions in foreign currency are able to access a wider range of hedging and diversification opportunities.

The simple message to diversify is not a new one, but it is one that has not sunk in for thousands of trustees within the SMSF space due to the appealing lure of equities and dividends.

While COVID-19 presents many challenges, one positive may be that it encourages SMSF investors to look to new investment strategies and investigate the benefits of diversification across asset classes.

 

Leonie di Lorenzo is an SMSF specialist at Citi Australia, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any individual.

For other articles by Citi, see here.

 

RELATED ARTICLES

Six guidelines on how to allocate SMSF cash

Are SMSFs getting too much of a free ride?

Asset allocation in a world of riskier developed markets

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Latest Updates

Investment strategies

Trump's US dollar assault is fuelling CBA's rise

Australian-based investors have been perplexed by the steep rise in CBA's share price But it's becoming clear that US funds are buying into our largest bank as a hedge against potential QE and further falls in the US dollar.

Investment strategies

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Property

Soaring house prices may be locking people into marriages

Soaring house prices are deepening Australia's cost of living crisis - and possibly distorting marriage decisions. New research links unexpected price changes to whether couples separate or silently struggle together.

Investment strategies

Google is facing 'the innovator's dilemma'

Artificial intelligence is forcing Google to rethink search - and its future. As usage shifts and rivals close in, will it adapt in time, or become a cautionary tale of disrupted disruptors?

Investment strategies

Study supports what many suspected about passive investing

The surge in passive investing doesn’t just mirror the market—it shapes it, often amplifying the rise of the largest firms and creating new risks and opportunities. For investors, understanding these effects is essential.

Property

Should we dump stamp duties for land taxes?

Economists have long flagged the idea of swapping property taxes for land taxes for fairness and equity reasons. This looks at why what seems fairer may not deliver the outcomes that we expect.

Investing

Being human means being a bad investor

Many of the behaviours that have made humans such a successful species also make it difficult for us to be good, long-term investors. The key to better decision making is to understand what makes us human and adapt.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.