Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 386

Three areas SMSFs should consider outsourcing

Just under one-third of SMSF assets (31%) are currently invested in direct shares, according to the 2020 Vanguard/Investment Trends SMSF Report. Direct property accounts for 16% of SMSF assets, while 27% of assets are currently held in cash and cash products.

By comparison, just 19% of SMSF assets are held in managed investments (11% listed, 8% unlisted). The bias towards direct ownership is understandable given the stated desire of SMSF trustees to have more control over their investments.

Here are three areas where it may make sense for SMSFs to outsource to external managers.

1. Global equities

SMSFs are often criticised for being underweight global equities relative to APRA-regulated funds. One often-cited reason is that international equities don’t receive the franking credits that are applied to Australian shares, leading to an outsized ‘home bias’ to domestic equities among SMSFs. While franking credits certainly have value, there are broader diversification benefits to having exposure to share markets outside Australia.

For SMSFs that want to invest in global equities, it makes more sense to use an external manager than purchase shares directly (indeed, there is evidence trustees are already doing this). First, a well-diversified portfolio of international shares can be cumbersome and difficult to manage for an individual investor. Second, it can be tricky to get exposure across all markets. Finally, currency fluctuations need to be considered and managed.

2. Small and microcaps

Small caps have the potential to deliver higher returns to investors but, inevitably, the trade-off is higher risk. So it pays to choose a small cap manager with a proven track record of identifying under-researched and undervalued companies.

For example, the technology sector – including biotechnology or software – requires a nuanced understanding of the intellectual property behind the company. But more important is how the company will monetise the technology and what value the market will ultimately ascribe to it.

Professional managers have the time and resources to research and monitor many of the 2,000 stocks that sit outside the S&P/ASX200. So while it might make sense to go direct for the large cap end of the market, it could reduce headaches for SMSFs if they enlist fund managers to help with small and microcap stocks.

3. Responsible investment

This approach to investing money has performed strongly in recent years, particularly during the volatility of the first half of 2020. However, it is a resource-intensive approach to investment management that can be tricky for DIY investors to replicate.

Responsible investing is referred to by many different names: ethical investing, sustainable investing, Environmental, Social and Governance (ESG) investing – just to name a few.

While each strategy has its own features, most responsible investors are united by their decision to sign the international Principles of Responsible Investment. The principles begin by declaring that professional investors “have a duty to act in the best long-term interests of their beneficiaries”.

Furthermore, responsible investors agree that traditionally non-financial issues related to the environment, society and corporate governance can affect the performance of investment portfolios.

SMSFs looking to make a positive impact with their investments as well as achieving strong returns should consider a responsible investment manager. But with the flurry of activity in this sector in recent years it can be hard to identify the right fund for you.

In fact, one of the difficulties for investors when choosing a responsible investment manager is deciphering how they implement non-financial analysis into their process, and how much impact this analysis actually has on the portfolio.

Morningstar’s ESG Commitment Level

Helpfully, a new white paper from Morningstar has laid out the level of ESG commitment of 40 asset managers and 107 investment strategies. It aims to distinguish funds that “truly focus on sustainable investing” from those that incorporate ESG factors but in a limited way.

Morningstar’s new qualitative ESG Commitment Level is entirely separate from the Morningstar Analyst Rating and is designed to be read in conjunction with the existing (quantitative) Morningstar Sustainability Rating. Many investors, according to the report, “feel confused about the claims they hear and read in sales materials and are unsure about the many different approaches to sustainable investing”.

It is pleasing to see Australian Ethical named as one of only six asset managers worldwide – and the only Australian investment manager – to receive the highest ESG Commitment Level of ‘leader’. Fund managers in this category have been identified by Morningstar as having a long history of commitment to ESG investing, with these considerations “ingrained and pervasive” across the firms.

When outsourcing is your best bet

Many SMSFs relish the ability to control all their investments. For some asset classes that can make some sense, but when it comes to areas like international equities, small caps and responsible investment it’s worthwhile to consider outsourcing to professional fund managers.

 

David Macri is the Chief Investment Officer of Australian Ethical Investment, a sponsor of Firstlinks. This information is of a general nature and is not intended to provide you with financial advice or take into account your personal objectives, financial situation or needs.

For more articles and papers from Australian Ethical, please click here.

 

5 Comments
DAVID IRELAND
December 08, 2020

Many of us SMSF trustees have diverse experience in business too. My own fund which is now 25 years along, has seen a lot. I am absolutely aware that there are funds and advisors who have a better track record than me. Compound growth exceeding 20% p.a. for the life of my fund is something that I am happy with and there it is! I don't want the best, I want to understand what I invest in and I enjoy the research. My one employed expert is my accountant who ensures that I meet the regulatory requirements. So yes, some of us like to be in control, (if there is such a thing), and yes, we might pay a price for that. With some active fund managers finding ways to creep their take using out-performance bonuses and the like, I am also confident that many funds probably do worse than I do too.

Jerome Lander
December 06, 2020

The most valuable components of a portfolio are worth outsourcing given the high level of expertise and time required to manage these successfully. These are:
(1) Asset allocation and portfolio construction - to a genuinely active and skilled portfolio manager
(2) Active strategy and manager selection requiring skilled manager selection and dynamic allocations (e.g. which strategies to use, how much, when to change weightings?). This includes the use of Alternatives.

Of course, finding a proven manager to outsource these aspects to isn't that easy, as these skill sets are rare indeed. It requires the identification of a highly focussed and experienced person and investment capability.

Ian
December 05, 2020

I trade global shares on a local platform. A little bit of effort to set it all up but easy and cheap to use. Highly recommended.

Ramani
December 04, 2020

Control in SMSFs must be calibrated to trustees' knowledge, skills and time allocation. The three areas make sense in this sense. Those who are unwilling and or unable to directly invest in Australian equities, bonds, hybrids or property might take recourse to ETFs in these sectors, as costs are a certainty while earnings are at best iffy.
Assets uncorrelated to traditional classes (gold, infrastructure, derivatives) might also be accessed through outsourcing, as long as the trustees understand the risks and expected rewards.
Beyond ESG, a moralistic perspective (about alcohol; tobacco; gambling; slave labour...) adds another dimension to filter out undesirables.

James
December 04, 2020

On global equities, accessing funds and ETFs is easy but it's also now not difficult to open an account to transact on foreign exchanges or local versions such as TraCRs.

 

Leave a Comment:

     

RELATED ARTICLES

Don't believe the SMSF statistics on investment allocation

SMSFs the new battleground in family disputes

ATO confirms SMSF global allocation “strongly understated”

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Australia’s bounty: is it just diversified luck?

Increases in commodity prices have fuelled global inflation while benefiting commodities exporters like Australia. Oftentimes, booms lead to busts and investors need to get the timing right on pricing cycles to be successful.

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Investment strategies

Five features of a fair performance fee, including a holiday

Most investors pay little attention to the performance fee on their fund but it can have a material impact on returns, especially if the structure is unfair. Check for these features and a coming fee holiday.

Interviews

Ned Bell on why there’s a generational step change underway

During market dislocation events, investors react irrationally and it should be a great environment for active management. The last few years have been an easy ride on tech stocks but it's now all about quality.  

SMSF strategies

Meg on SMSFs: Powers of attorney for your fund

Granting an enduring power of attorney is an important decision for the trustees of an SMSF. There are alternatives and protections to consider including who should perform this vital role and when.

Property

The great divergence: the evolution of the 'magnetic' workplace

The pandemic profoundly impacted the way we use real estate but in a post-pandemic environment, tenant preferences and behaviours are now providing more certainty to the outlook of our major real estate sectors.

Shares

Bank reporting season scorecard May 2022

A key feature of the May results for the banking sector was profits trending back to pre-Covid-19 levels, thanks to lower than expected unemployment and the growth in house prices.

Why gender diversity matters for investors

Companies with a boys’ club approach to leadership are a red flag for investors. On the other hand, companies that walk the talk on women in leadership roles perform better, potentially making them better investments. 

Economy

Is it all falling apart for central banks?

Central banks are unable to ignore the inflation in front of them, but underlying macro-economic conditions indicate that inflation may be transitory and the consequences of monetary tightening dangerous.

Sponsors

Alliances

© 2022 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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.