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.

 

  •   27 May 2020
  • 1
  •      
  •   

RELATED ARTICLES

Six guidelines on how to allocate SMSF cash

Bonds are copping a bad rap

Are SMSFs getting too much of a free ride?

banner

Most viewed in recent weeks

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

The refinery problem: A different kind of energy crisis in 2026

The Strait of Hormuz closure due to US-Iran conflict severely disrupted global energy supply chains. While various emergency measures mitigated the crude impact, the refined product market faces unprecedented stress.

Has Australia wasted the last 30 years?

The 20 years after Peter Costello left Treasury have been deemed wasted...by Peter Costello. The missed opportunities for Australia began long before.  

3 ways to defuse intergenerational anger

With the upcoming budget increasingly likely to include bold proposals to alter the tax code I’ve outlined three incremental steps with fewer unintended consequences.

Navigating the next stage of life in retirement

Retirement planning is more than just saving enough money. Long-term care needs, housing choices, and social networks are just as critical for a happy and enjoyable life.

The missing 30%: how LIC returns are understated, and why it matters

The perceived underperformance of LICs compared to ETFs is due to existing comparison data excluding crucial information, highlighting the need for proper assessment and transparent reporting.

Latest Updates

Superannuation

Do super funds need a massive wake up call?

UK retirement expert, Guy Opperman, believes super funds are failing at supporting members in deaccumulation. Here is what Australia should do about it. 

Retirement

Sequencing risk resurfaces for retirees

A retirement strategy must consider how both the timing of cash flows and the sequence of returns impact the final dollar outcome from which a retirement is funded.

SMSF strategies

Meg on SMSFs: Payday super – why should SMSF members even care?

Not filing your SMSF annual return on time can mean missed contributions under the new Payday super regulation. 

Strategy

There will be no permanent underclass

Worries about AI causing mass job loss are misguided. Far from creating a permanent underclass, Like other technological innovations AI will improve living standards around the world.

Taxation

Reforming the taxation of wealth and wealth transfers

As the budget approaches debate continues about the need and method for addressing wealth inequality. Could reinstating wealth transfer taxes be the answer?

Investment strategies

The biggest oil shock in history. Why isn't the price higher?

While increases in oil prices are dominating media coverage of the turmoil in the Middle-East it is worth exploring why prices haven't gone up more. 

Financial planning

Structured giving's new moment

A big year for philanthropy has seen multiple tax changes impact the approach donors are taking. For those with the intention to give generously there is a third structure available in the structured giving landscape.

Sponsors

Alliances

© 2026 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.