SMSFs look mainly to banks, BHP

Australian investors, including self-managed superannuation fund (SMSF) members, are not looking beyond a handful of Australian shares, creating a concentration risk that could negatively impact retirement income, according to Pinnacle aShares.

The fund manager’s head Chris Meyer said few Australian investors were looking beyond the Australian Securities Exchange (ASX) and a basket of mainly bank shares, and this bias was on the biggest threats to investments.

“Australians have as much as 75% of their share portfolios in Australian shares while the ASX makes up only 3% of the size of global equity markets,” he said.

“This suggests an overweighting of more than 70% to local shares, compared to just under 30% for North Americans and just over 40% for UK investors.  

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“If you dig a little deeper into the stocks that make up the Australian red overweight bar, the results show a staggering overweighting towards a handful of shares, mainly the banks, adding to this concentration risk.”

Meyer noted that the top five Australian shares in SMSF portfolios were Commonwealth Bank (6% weighting in portfolios), BHP (5.1%), Westpac (5%), NAB (4.5%), and ANZ (4.3%).

“While these bank stocks and particularly BHP have produced good yield for investors over the past few years, investors should not ignore the single sector risk they are taking,” Meyer said.

“For the banking sector, the Financial Services Royal Commission that came to an end earlier this year should have been a wake-up call. Furthermore, after an extraordinary year of dividends, BHP warned of significant economic headwinds in its recent annual results.”

Meyer said SMSF members needed to remind themselves of the narrow sector and country risk they were taking.

He believed that investing myths were the cause of the concentration risk which were:

• International equities had low dividend – high dividend paying securities exists which good investors and analysts should be able to identify;
• Currency hedging could dilute income – investors should be able to manage the FX income to the underlying securities; and
• Asset class selection was the biggest driver of returns – a combination of equities and bonds could provide a lower risk portfolio compared to an equities only portfolio.