Diversification increasingly important to SMSFs

While growing numbers of self-managed superannuation fund (SMSF) trustees believe diversification is important, they are not putting their money where their mouth is and investing in more varied assets.

According to the 2018 Vanguard/Investment Trends SMSF Report, 82 per cent of trustees think that diversification is significant but only 54 per cent believe that their portfolio is already diversified enough.

Furthermore, SMSFs’ perception of what quantified diversification was quite narrow, with the majority believing that they could achieve diversification using only a range of shares, with 82 per cent considering a portfolio invested in 30 Australian individual shares to be well diversified.

Vanguard head of corporate affairs, Robin Bowerman, said this was concerning as instead of being diversified, such asset allocation “instead harboured high equity concentration risk and home country bias, in addition to very low levels of exposure to international shares and bonds”.

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“We believe that while there is a growing understanding of diversification, SMSFs seem to be bearing significant risk, largely relying on continued success of the Australian share market, which represents just three per cent of the global investable equity market,” he said.

The report did show that SMSFs were seeking out broader asset allocations through managed investments though.

The shift towards managed investments had occurred largely at the expense of direct shares. Five years ago, SMSFs roughly invested 45 per cent of their assets in direct shares and 12 per cent in managed investments, whereas this year that had changed to 36 per cent and 22 per cent respectively.

Chief executive of Investment Trends, Michael Blomfield, pointed to this shift from single line investments through stocks to multiple lines from managed investments and ETFs as trustees sought diversification as one of the most interesting developments to be found in the report.

“The increased understanding and implementation [of diversification] is a really good thing,” he said.