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Achieving portfolio diversification

By James Dunn

The rise of self-managed superannuation funds (SMSFs) in Australia has been nothing short of breathtaking. In 2003, according to super research group Rainmaker, there were just over 260,000 SMSFs, holding about $108 billion in assets, or one-fifth of the superannuation pool. Now there are almost 560,000 funds – representing about one million individual trustee-members – holding $590 billion, nearly one-third of all superannuation money. SMSFs now represent the largest single chunk of the Australian super pool.

But with the huge vote of confidence from Australian investors in taking control of their retirement income strategy comes one clear concern: diversification. 

Australia’s army of SMSFs are generally not well-diversified investors. At June 2015, their largest holding was Australian shares, which, at $187 billion, represented almost 32 per cent of assets. The next largest holding was cash and term deposits, with $158 billion, or about 27 per cent of assets.

In stark contrast, SMSFs had invested just $1.8 billion in international shares in the June 2015 quarter, or less than 1% of their portfolios. Even if many SMSFs are tapping into international share markets through the $52.5 billion (9 per cent of total assets) invested in unlisted trusts, the heavy preference for Australian shares and cash in SMSF portfolios – and the relative lack of overseas diversification – is clear.

This is poor investment practice, says Gavin White, chief executive officer of Invast Financial Services and chairman of the firm’s investment committee. 

Given their huge concentration on Australian equity and cash investments, White says Australian SMSF portfolios often lack any basic degree of diversification into overseas assets – setting up several major problems with this.

First, he says, investors are missing out on often-superior returns offered by offshore financial markets, with the S&P/ASX 200 underperforming the US stock market, and most European markets over the past year.

“Second, home-bound SMSFs are missing out on booming sectors, such as the all-important healthcare and technology industries, for example, which aren’t well represented in the S&P/ASX200, while they have effectively over-dosed on bank and resources shares,” says White.

“The third problem with not diversifying offshore is that Australian SMSF investors are missing out on benefits associated with any Australian currency depreciations – if SMSFs have offshore investments denominated in offshore currencies such as the US dollar, to the extent that the Australian dollar falls, investors will gain some returns back on their unhedged international investments, which work to offset losses on their Australian investments if the local share market falls.”

White says one easy way for SMSFs to redress the common lack of exposure to international markets is to use Invast’s DMA (direct market access) CFDs (contracts for difference), which provide quick access into a wide range of offshore markets. The CFDs are offered over individual stocks and market indices on more than 30 overseas exchanges.

(A CFD is a leveraged equity derivative that represents a theoretical order to buy or sell a certain number of shares, or a theoretical holding in a clone of a major index: a small margin is required to take a larger position. DMA CFD orders are replicated by the provider placing a corresponding stock order in the underlying market, at the market price: Invast hedges client orders one-for-one in the underlying exchange, using its own capital: investors lodge a margin as low as 5 per cent.)

As long as CFD products are allowed by the SMSF’s investment strategy, White says DMA CFDs can provide quick and simple access to the opportunities and varied exposures in offshore markets, without the administrative headache that often accompanies a direct share account. DMA CFDs also allow the SMSF to take a view on an individual foreign market – through either fundamental or technical analysis – and express that view on the direction of the relevant index, ‘short selling’ if they expect the index to fall.

DMA CFDs also allow a SMSF to hedge against a fall in the Australian share market: taking a ‘short’ position in the S&P/ASX 200 index can give them an approximate hedge, as protection against a fall in their share portfolio.

To find out more about Invast’s DMA Equity & Futures CFDs, click here

Published on: Monday, December 14, 2015

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