What are SMSFs made of?

3 min read

Sugar and spice, or puppy dog tails – what are SMSFs made of?

When it comes to self-managed super funds (SMSFs) and how they have invested, it seems that over time a number of myths have been formed.  Here we look at how they are really invested.

The latest March 2019 Self-managed super fund quarterly statistical report issued by the Australian Taxation Office helps to shed some light on this question.1  Whilst these statistics are based on information or extrapolations as at 31 March 2019, we are using this information to support our opinions against a number of these myths. 

Myth #1 - SMSFs are small funds

SMSFs should not be considered small.  The only thing that is small about SMSFs is that they have small membership numbers.  Currently restricted by legislation to a maximum of four members, over 92% of all SMSFs actually have only one or two members2.  Only 3.6% of all SMSFs have the maximum of four.

When it comes to balances, however, SMSFs appear to be ahead of the game.  In October 2017, ASFA (the Association of Superannuation Funds of Australia) published statistics stating that the average super balance (for 2015/16) at retirement for males was $270,710 and for females was $157,0503.  The average household super savings at retirement was $337,100.  Making the assumption that balances at retirement is most likely to be when they are at their highest, it’s interesting to compare this to SMSFs.

As at 30 June 2017, according to the latest ATO statistical report, the average balance per SMSF member was $652,4654.  Whilst this number could be inflated by some SMSFs that have significant values, the median value was still $393,141.

Myth #2 – SMSFs are used predominantly for borrowings

With SMSFs the most feasible superannuation option under which it is possible to borrow to invest, some SMSF members have sought to utilise this opportunity.  However, while there have been many reports over the years to say that SMSFs and borrowings are of significant concern, how much has actually been borrowed by SMSFs5?

According to the latest ATO SMSF statistical report, there was $42,486 million invested in SMSFs that is subject to limited recourse borrowing arrangements as at 31 March 2019.  Whilst this number may appear significant, this is less than 6% out of total net SMSFs assets of $715,359 million.

After a relatively large increase in the ratio of limited recourse borrowing arrangements to Net Assets (6.2%) in the June 2017 quarter, the level of gearing for SMSF has remained relatively stable, and has actually decreased over time.

Myth #3 – SMSFs are overweight in direct property

SMSFs allow members to invest directly in property, with residential and commercial property viewed by some as prime investment opportunities.  As a result, and without a need to be diversified, there have been concernsthat SMSFs are overweight property, and combined with the perceived level of SMSF debt and a cooling property market, there is a perception that this could impact members’ retirement balances.

Again, the statistics perhaps tell a different story.  As at 31 March 2019, SMSFs had a total of $70,149 million invested in non-residential property in Australia, and further $36,320 million in Australian residential property.  Add to this a total of $509 million in overseas property investments, and the total property investments for SMSFs comes to $106,978 million – representing about 15% of net SMSF assets (and slightly down from the ratio of 17.75% in June 2017).

Myth #4 – SMSFs are invested more aggressively than the average super fund

Perhaps a little more difficult to dispel, equally this myth is perhaps hard to prove.  The use of statistics, averages and different reporting or recording methods can make comparisons difficult.  However, if you consider that SMSFs members are more likely to utilise the services of a professional to assist in running their SMSFs, then it is perhaps more likely that there will be a higher proportion invested into growth assets (deemed by some to mean invested more aggressively) than the average super fund7.  But what is average anyway?

According to MoneySmart8, most funds offer a default investment option of a balanced portfolio.  This is further defined as representing an investment option that is weighted approximately 70% to shares and property and 30% to cash and fixed interest.  Whilst the ATO’s SMSF statistical report doesn’t quite give you full investment breakdown, as all managed investments are grouped together (even if a fixed interest fund), the allocation of SMSF investments classified as cash and term deposits represents about 24% of net SMSF assets as at 31 March 2019.

This might be slightly underweight to a typical balanced portfolio, but is not significantly different.

What this means

As with all averages and statistical reports for an entire segment, it’s very hard to discern how SMSFs are truly invested.  Certainly, you can look at the ATO’s statistical report and gather a fair amount of averaged information, but that is all it is.  But the report does include some important facts:

  •  SMSFs continue to be a significant part (almost 27%) of the overall superannuation market.
  • Whilst SMSFs can and do borrow, on a relative basis for the entire SMSF market, the number of SMSFs using borrowing is not that significant.
  • Whilst SMSFs can and do invest directly into property, on a relative basis for the entire SMSF market, it’s not a significant investment of overall assets.

Really, the statistics suggest that overall SMSFs are invested largely in line with typical investment allocations of default balanced funds across the superannuation sector9.  The real difference is that SMSF investors, with the help of professional support, have the opportunity to pick the underlying investments in each category that aligns to the particular member needs.

[1] https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/SMSF/Self-managed-super-fund-quarterly-statistical-report---March-2019/
[2] https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/SMSF/Self-managed-super-fund-quarterly-statistical-report---March-2019/?page=2#Membership_sizes_table
[3] https://www.superannuation.asn.au/ArticleDocuments/359/1710_Superannuation_account_balances_by_age_and_gender.pdf.aspx?Embed=Y
[4] https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/SMSF/Self-managed-super-fund-quarterly-statistical-report---March-2019/?page=2#Average_and_median_assets_table
[5] https://www.afr.com/personal-finance/superannuation-and-smsfs/ato-worried-about-12b-in-smsf-loans-20190117-h1a5ka
[6] https://www.wisr.com.au/Articles/SMSFs-other-income-sources
[7] https://www.afr.com/personal-finance/criticism-of-smsf-asset-mix-is-unfair-20150914-gjm4g0
[8] https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-investment-options
[9] https://www.moneysmart.gov.au/superannuation-and-retirement/self-managed-super-fund-smsf

Contact us or speak to your financial adviser

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Information current as at 25 June 2019.

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