Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 521

The drawbacks for SMSFs moving funds into cash

Investment trends can sometimes be hard to pick, but the huge and ongoing investor cash inflows into Exchange Traded Funds (ETFs) that invest in fixed income securities such as government and corporate bonds is difficult to miss.

Fixed income inflows are currently running at a record pace, largely thanks to deteriorating economic conditions that have spurred a spike in interest rates. Higher interest rates are translating into higher fixed income returns.

Over the first half of this year, investors in the United States poured US$99.4 billion (A$144.3 billion) into fixed income ETFs, according to Morningstar. Meanwhile, European demand for fixed income ETFs hit record levels as investors added US$36 billion (A$52.2 billion) into listed bond funds.

Australian fixed income inflows also surged over the six months to 30 June 2023, according to data from the Australian Securities Exchange (ASX) and separate data from Vanguard. In Australia, the combined inflows into Australian-listed ETFs that invest in bonds exceeded the inflows into ETFs that invest in domestic and global shares. That’s despite the strong first half rally on global equity markets, including on the ASX.

Collectively, investment inflows into Australian and global fixed income ETF products totalled $2.49 billion over the first half, which compared with inflows of $1.56 billion into Australian and global equity ETF products.

SMSFs become more defensive

This uplift in fixed income inflows is also likely to extend to the investments being made by Australia’s self-managed superannuation fund cohort.

The 2023 Vanguard/Investment Trends SMSF Investor Report, released in June, found that many SMSF investors had started to increase their allocation to defensive assets in general. Conducted between February and March 2023, the annual report now in its 18th year represents the largest scale quantitative survey of Australian SMSF investors.

According to the report, one in five SMSFs acknowledge that the prevailing economic conditions have had a significant impact on their approach in selecting investments, with over a third of SMSFs indicating an increased allocation to cash and cash-like products.

Direct shares have seen the largest relative decline in terms of SMSF asset allocation on a dollar-weighted basis. Of the SMSF survey respondents, 36% said they had rebalanced their investment portfolio in the past year by between 10% and 50%. This had resulted in their average asset weighting to direct shares declining from 36% in 2022 to 31%, as shown below.

The primary reasons cited for this were because SMSF trustees had adopted a more defensive stance and had a negative outlook on overseas shares. With the current unsettled economic landscape of high interest rates and inflation, capital protection remains a priority for most SMSFs.

It is typical to see increased allocation to defensive assets such as fixed income or cash products during uncertain times. With interest rates rising, the data suggests SMSFs are favouring assets that they see as low risk.

The bottom line on cash

There is a common misconception that cash is a risk-free asset. While it is not prone to daily market volatility like shares are and is highly liquid, cash does have inherent investment risks.

A decade of record-low interest rates has meant that cash as an asset class has delivered an average annualised income return of just 1.9% since 2012. That’s lower than any other major asset class.

Worse still, after taking high inflation levels into account, hovering between 5% and 7% at time of writing, real cash returns have been negative for some time.

Although rising interest rates have created short-term pain for Australian investors, they have helped to improve long-term return expectations for bonds.

While bond prices typically reprice lower when interest rates rise, investors with a sufficient long-term investment horizon will ultimately be better off.

Investors are also flocking to bonds in their search for diversification and income as yields continue to stabilise (a signal that investors are becoming more optimistic), presenting an attractive alternative to holding cash which has generally underperformed bonds post rate hike cycles.

Being slightly higher-risk than cash, bonds are generally expected to outperform cash over the long term. As of June this year, Vanguard’s median annualised return expectations for Australian and global bonds ex-U.S (hedged to Australian dollars) over the next decade were 3.4% to 4.4%, and 3.6% to 4.6%, respectively.

 

Balaji Gopal is Head of Personal Investor and Financial Adviser Services at Vanguard Australia, a sponsor of Firstlinks. This article is for general information purposes only and does not consider the circumstances of any individual.

For more articles and papers from Vanguard Investments Australia, please click here.

 

2 Comments
Ramani
August 13, 2023

The increased allocation to cash might be due to investment uncertainty (the present seems eternally volatile), reversion to normal minimum rates from 2023/24, members moving to a higher minimum bracket, publicised property sector collapses and need to rollover to an APRA fund or avoid the punitive 17% proxy death duty on super paid to tax non-dependents.

As with navigating non super assets during twilight time, a prudent estimate of cash flow needs allowing for health, relationship and capital demands and cashing up (dollar cost averaging on disinvestment) would help, but remembering that non super assets and all of liabilities must be included.

Cash risks exposing the nest egg to inflationary loss of value and opportunity loss of investing in more aggressive assets.
Government bonds, often touted as ‘safe’ are less so when sovereign country risk (remember the Asian and Global Financial Crises when once reputed governments quickly descended into insolvency), currency risk (easily manipulated by the Gordon Gekkos and greedy finance ministers) and interest rate risk ( as yields rise) are factored in.

There is no magic bullet. We should console ourselves that these are problems of having a nest egg. The Bangladeshi family buffeted by Brahmaputra floods is not so lucky.

Schadenfreude!

Simon
August 12, 2023

I don't get why anyone would waste their time investing in bonds with a 4.5% yield - and that is presumably before management fees - when there are numerous bank savings accounts offering 5% with no fees and no volatility.

 

Leave a Comment:

RELATED ARTICLES

The best income-generating assets for your portfolio

Which shares and funds do SMSFs invest in?

Meg on SMSFs: Timing and the new super tax

banner

Most viewed in recent weeks

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

Australian stocks will crush housing over the next decade, one year on

Last year, I wrote an article suggesting returns from ASX stocks would trample those from housing over the next decade. One year later, this is an update on how that forecast is going and what's changed since.

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.

Taxpayers betrayed by Future Fund debacle

The Future Fund's original purpose was to meet the unfunded liabilities of Commonwealth defined benefit schemes. These liabilities have ballooned to an estimated $290 billion and taxpayers continue to be treated like fools.

Australia’s shameful super gap

ASFA provides a key guide for how much you will need to live on in retirement. Unfortunately it has many deficiencies, and the averages don't tell the full story of the growing gender superannuation gap.

Looking beyond banks for dividend income

The Big Four banks have had an extraordinary run and it’s left income investors with a conundrum: to stick with them even though they now offer relatively low dividend yields and limited growth prospects or to look elsewhere.

Latest Updates

Investment strategies

9 lessons from 2024

Key lessons include expensive stocks can always get more expensive, Bitcoin is our tulip mania, follow the smart money, the young are coming with pitchforks on housing, and the importance of staying invested.

Investment strategies

Time to announce the X-factor for 2024

What is the X-factor - the largely unexpected influence that wasn’t thought about when the year began but came from left field to have powerful effects on investment returns - for 2024? It's time to select the winner.

Shares

Australian shares struggle as 2020s reach halfway point

It’s halfway through the 2020s decade and time to get a scorecheck on the Australian stock market. The picture isn't pretty as Aussie shares are having a below-average decade so far, though history shows that all is not lost.

Shares

Is FOMO overruling investment basics?

Four years ago, we introduced our 'bubbles' chart to show how the market had become concentrated in one type of stock and one view of the future. This looks at what, if anything, has changed, and what it means for investors.

Shares

Is Medibank Private a bargain?

Regulatory tensions have weighed on Medibank's share price though it's unlikely that the government will step in and prop up private hospitals. This creates an opportunity to invest in Australia’s largest health insurer.

Shares

Negative correlations, positive allocations

A nascent theme today is that the inverse correlation between bonds and stocks has returned as inflation and economic growth moderate. This broadens the potential for risk-adjusted returns in multi-asset portfolios.

Retirement

The secret to a good retirement

An Australian anthropologist studying Japanese seniors has come to a counter-intuitive conclusion to what makes for a great retirement: she suggests the seeds may be found in how we approach our working years.

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.