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Self Managed Super Fund (SMSF) Article
Debunking the myth about small super funds
By Tony Negline.
This article may be out of date.
24th September 2008
It is dangerous to talk in absolute terms about Self Managed Super Funds because they are such a personal investment structure.
For example even the name for these super funds is a matter of personal preference. The term Self Managed Super Fund or SMSF was dreamed up by government and has been around for about 10 years. In the funds management industry there is a tendency to think that 'SMSF' has slipped into common usage.
Perhaps the most popular search words used on the internet might be a good guide as to what people call these types of funds. Search data by Google reveals that 'SMSF' is not in the list of top items of searches for superannuation issues.
Investment Trends, a research company, recently published the latest SMSF Investor Report for AMP Capital Investors. The report delivers a fascinating profile of self managed funds and how investors use these them. These reports continue to dispel many urban myths about small super fund participants as cowboys or plonkers or both.
The Federal Government Minister responsible for superannuation, Senator Sherry, is on record as saying that he is concerned about small fund trustees knowledge. The Senator even floated the idea that mandatory education qualifications might have to be introduced for all super fund trustees.
Mr Mark Johnston, principal of Investment Trends believes that DIY Super Fund trustees are "savvier than they are given credit for".
Forty-six percent of all small fund said they had incurred paper losses. Mr Johnston said that further research revealed that 30% of all small funds had substantial paper losses.
Yet his research shows that 66% of small fund trustees say that the recent share market turbulence has not made any difference to their long term plans.
In May, 25 percent of respondents said they were opportunistically buying undervalued assets and fourteen percent said they were accumulating money into cash and will invest once markets calm down. But Mr Johnston said that more recent research conducted after the June and July volatility showed that less funds were buying and more were holding onto cash until the market stabilized.
Mr Johnston believes that DIY Super fund trustees are displaying the classic attributes of buy and hold investors. They have seen previous cycles and are not scared of shorter-term volatility.
One common misconception about small super funds is that they tend to hold a high level of cash. Tax Office data shows that about 19% of all small fund assets were held in relatively liquid assets. Investment Trends estimates small fund cash holdings at 17% of super fund (before recent turbulence it had been about 14%). Mr Johnston estimates that small super funds have about $11 billion of money sitting in cash from contributions made in the last twelve months which is yet to be invested.
Surprisingly only 2% of small super fund trustees are interested in products which contain gearing. Investment Trends has identified that about 20% of SMSFs are interested in allowing their fund to borrow. These funds tend to be run by younger investors who are concerned that they will not have enough money in retirement and believe that gearing might be one tool to help them achieve their objectives. They recognize the additional volatility gearing carries but also know that they have time on their side.
In December 2004 when Investment Trends first conducted this research, they found that less than 30% of small fund trustees used a financial planner. By December 2005 this had increased to about 35%. The most recent survey says that about half of all funds use a planner. This is a fascinating result and Investment Trends think that this large increase is probably due to the Costello July 2007 super changes because of the large number of small funds created in the April to June 2007 period.
One should be careful with this data. The ATO say that over 95% of small funds use the services of a tax agent. Fourteen percent of respondents to the Investment Trends survey say they rely on no one to help run their fund, including a tax agent.
Investment Trends has always asked small fund trustees what is the hardest part of running their fund. In December 2005, 32% of respondents said that "keeping track of changes in the rules and regulations". In July '08 only 6 percent of fund trustees think this is still the hardest part of super fund management.
Happily 33% of trustees now think there is nothing difficult about running their fund which is a large increase from 18% in May 2007.
Investment Trends found that the average age of small super fund members is 50 and the average time to retirement is 12 years. This should be contrasted with another survey prepared by a different area of AMP which looked at members of corporate super funds that showed an actual average retirement age of 60 years and 8 months (down from 63 in December 2007).About thirty percent of SMSFs are run by fully retired investors, another 30% are run by small to medium sized business owners and 30 percent are run by full-time and part-time employees. Eight percent of people classify themselves as retired but still working sometimes.
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