Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 158

SMSFs and infrastructure is marriage made in heaven

It would seem a marriage made in heaven. An Australia thirsty for infrastructure capital and SMSF trustees looking for investments offering a healthy yield at a time of record low interest rates with less volatility than either property or equities.

Research shows a majority of trustees think long term when making their investment decisions. An asset class that falls between cash/government bonds and property/equities in terms of risk profile and offering yields above the cash rate would have appeal to the more than one million people who are SMSF trustees and members. In particular, those in the retirement phase, where income is a priority, would welcome access to this asset class.

The reality is, however, that SMSFs are effectively shut out from direct infrastructure investment – a potential $590 billion in funds under management can’t find a direct infrastructure home.

Massive demand for infrastructure

There can be no debate that Australia’s infrastructure needs could sorely do with this capital. Like all developed countries, Australia needs to both replenish its existing infrastructure and invest in new stock as our population grows rapidly. It is estimated Australia’s population will reach 30 million people by 2030, and that number will require an infrastructure spend of at least $350 billion in the next decade, according to the Australian Council of Learned Academics.

Politicians of all shades have recognised this need. Former Prime Minister Tony Abbott wanted to be known as the “Infrastructure Prime Minister”. His successor, Malcolm Turnbull, appointed a Minister for Cities, recognising that much of the spending will need to be in the major cities, particularly Sydney, Melbourne, Brisbane and Perth, where the combined population is expected to reach 18 million by 2030. Motorists in these cities today will relate horror stories about road congestion; imagine how much worse it will be if the issue is ignored and populations grow at these projected rates.

It’s not just traffic congestion. Water, rail (urban and inter-city), energy and telecommunications, ports (air and sea) will all require investment if Australia is to have a fully-productive economy. But infrastructure comes with a hefty price tag, and governments of all persuasions face budgetary restraints. In this fiscal environment, the $2 trillion superannuation pool is an obvious source of capital.

Barriers to SMSF investment

To date only some of the larger funds have invested directly in this asset class. At 30 June 2015, the APRA-regulated funds had $54.8 billion (4% of their total FUM) invested in Australian and overseas infrastructure. Of this figure, two superannuation sectors, industry funds and public sector funds, dominate with $45.8 billion (84%). But clearly more capital is needed, and the $590 billion SMSF sector seems an obvious choice.

Currently most super funds invest in infrastructure programmes that require capital exceeding $500 million, but SMSFs are perfectly placed to invest in smaller infrastructure projects (i.e. $100 million or less), which have funding structured appropriately for them.

But it is extremely difficult for SMSFs to invest directly in infrastructure. The reasons are many but four stand out:

  • high dollar entry point
  • illiquidity of the asset
  • hefty entry and ongoing management fees
  • lack of strong government backing for this initiative.

So why haven’t governments (and the industry for that matter) devised solutions to allow SMSFs to invest in infrastructure. It surely can’t be that governments believe the investment acumen needed for this asset class is beyond SMSF trustees. The evidence is overwhelming that they are smart investors.

A Commsec report issued in late 2015 showed SMSF trustees were early buyers when the share market dropped. A recent ATO report said:

“Changes in the composition of SMSF asset portfolios show the ability of (trustees) to adjust to changing circumstances and economic conditions.”

In recent times, trustees have shown a growing appetite for ETFs and overseas shares (typically via managed funds) as they diversify away from their traditional investments in blue-chip Australian equities, cash and property.

What needs to be done?

The problem is far from insurmountable, as the SMSF Association outlined in its submission to the Financial System Inquiry (FSI), before the Senate Economics Committee, and to the Federal Government and other relevant stakeholders.

The options we canvassed included offering unitised investments in smaller parcels (our figure was $25,000) or issuing small-scale infrastructure bonds. If these options were adopted, then the issue of risk would have to be addressed. While investment in brownfield infrastructure does offer a degree of security, the same cannot be said of greenfield projects (think BrisConnect and the Lane Cove tunnel). A government guarantee or support might be part of the investment equation.

Liquidity is an issue that will demand answers from trustees with a secondary market probably the most viable option. Trustees, especially those in the retirement phase, will want to be able to trade their investments if their financial circumstances change. But although they will want this option, their investment history shows they are ‘sticky’ investors who take investment decisions based on the long term. Liquidity is not just an issue for SMSFs, with the APRA-regulated funds also raising the topic in their submissions to the FSI.

Those who argue managed funds offer infrastructure assets for the retail market must accept this is only part of the solution. It overlooks the fact that trustees prefer to invest directly. Losses incurred by managed funds in the wake of the GFC left trustees wary about this investment structure.

Politicians and the industry need to bring some ingenuity to this issue, because it is hard to see the downside. SMSF trustees want yield, and have the investment acumen to understand this asset class. On the other side of the ledger, Australia needs capital for infrastructure, and to effectively exclude a $590 billion pool seems short-sighted, to say the least. It’s an issue the incoming government must address and engage on with the industry.

 

Andrea Slattery is Chief Executive Officer and Managing Director of the SMSF Association.

 

RELATED ARTICLES

Advantages of splitting superannuation contributions

Getting the most from your age pension

banner

Most viewed in recent weeks

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

Latest Updates

Property

Coalition's super for housing plan is better than it looks

Housing affordability is shaping up as a major topic as we head toward the next federal election. The Coalition's proposal to allow home buyers to dip into their superannuation has merit, though misses one key feature.

Planning

Avoiding wealth transfer pitfalls

Australia is in the early throes of an intergenerational wealth transfer worth an estimated $3.5 trillion. Here's a case study highlighting some of the challenges with transferring wealth between generations.

Retirement

More people want to delay retirement and continue working

A new survey suggests that most people aged 50 or over don't intend to stop work completely when they reach retirement age. And a significant proportion of those who delay retirement do so for non-financial reasons.

Economy

US debt, the weak AUD and the role of super funds

The more the US needs capital and funding, the higher its currency goes. For Australia, this has become a significant problem as the US draws our capital to sustain its growth, putting pressure on our economy and the Aussie dollar.

Investment strategies

America eats the world

As the S&P 500 rips to new highs, the US now accounts for a staggering two-thirds of the world equity index. This looks at how America came to dwarf other markets, and what could change to slow or halt its momentum.

Gold

What's next for gold?

Despite a recent pullback, gold has been one of the best performing assets this year. What are the key factors behind the rise and what's needed for the bull market in the yellow metal to continue?

Taxation

Consulting on the side? Don't fall into these tax traps

Consultants must be aware of the risks of Personal Service Income rules applying to their income. Especially if they want to split their income or work through a company.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.