The 2016 SMSF Investor Report from research provider Investment Trends showed that while the typical SMSF portfolio consisted of 18 shares, 34% of the value of this portfolio was allocated to financial companies (up from 31% in 2015) and 19% to resources and materials (down from 21% in 2015).
Commonwealth Bank head of SMSF customers Marcus Evans says that with the performance of both the financial and resource sectors weighing on the local index over the past 12 months, returns for many SMSF investors have suffered.
While the commodity rout took a toll on the heavyweight resource companies, slowing growth and increased regulation has impacted banking stocks. Against this backdrop, the stronger performance of other sectors has highlighted the benefit of looking beyond the index’s largest companies by market capitalisation, Evans says.
At the time of writing, the S&P/ASX 200 index is down 9.03% over the 12 months to May 6, while the more concentrated S&P/ASX 20, comprising the largest companies on the index by market capitalisation, is down more than 15%.
The right mix for your fund
While the right mix of shares for an SMSF portfolio will obviously depend on the requirements of the fund’s investment strategy based on members’ risk profiles and life stages, there are a range of risks inherent in being too concentrated in a particular part of the index.
This is due to exposure to sector specific risk, and also, depending on the actual nature of the stocks involved, may in fact represent the risk of misalignment between growth that can be delivered and ability to reach and service longer term requirements.
Growth or income?
Unless a fund is in pension phase, for instance, stocks that have the ability to deliver growth are likely to be a key focus for SMSFs.
But while many SMSF investors find dividends and franking credits appealing, ultimately having the income / growth skew incorrect can risk jeopardising delivery of retirement goals.
This is where having a professional assess whether your portfolio is right for your goals and circumstances can be beneficial.
Because there will be no one-size-fits-all approach that will work for every fund’s circumstances, it can be beneficial to seek assistance both with conducting a portfolio review and designing a tailored portfolio.
- CommSec Advisory can assist SMSFs both with a portfolio review and designing a tailored portfolio
Conducting a regular review
All shares carry the risk of capital loss and past dividends are no guarantee of future income, which means it pays to regularly review your portfolio to ensure it is still delivering what your fund’s members require.
In addition to this, as you contribute more over time and your portfolio grows, you may also want to further extend the breadth of what you hold, by looking into international shares, for instance, if you haven’t previously.
Regularly reviewing and documenting your fund’s investment strategy is a requirement for SMSF trustees.
- Read more about this requirement on the Australian Taxation Office (ATO) website
There are a number of ways to achieve diversification within your share portfolio, including using funds.
Exchange traded funds (ETFs) for instance, aim to replicate the performance of a particular index or group of assets. However, while SMSFs have been among those to adopt ETFs in Australia, it’s again important to make sure that you are selecting the correct ETF for your portfolio.
If, for example, a fund already has stock holdings heavily skewed to the largest companies in the S&P / ASX 200 then a fund replicating this index for instance, would have the effect of further concentrating holdings.
Managed funds meanwhile pool money from multiple investors with professional managers then investing this, aiming to generate returns in line with a stated objective.
- CommSec One-off Share Portfolio Advice can help make sure you are holding the right assets for your circumstances
Diversify at your portfolio level
While it’s good practice to diversify among your share investments, it’s also important not to forget that at the portfolio level, diversifying among different asset types, such as property, cash, fixed interest and both international and local shares can go a long way in protecting against volatility.