Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 359

Is it the end of cash for SMSFs?

Falling SMSF cash balances over the past five years are tipped to accelerate on the back of new COVID-19 challenges, as interest rates look set to stay lower for longer.

These interest rate declines dominated the headlines for SMSFs during 2018 and 2019, as many trustees reconsidered their investment strategies. The average SMSF reduced its cash balance by 6% in the five years prior, according to the September 2019 data from the Australian Tax office. SMSFs are certainly looking for alternatives.

Challenges for SMSF portfolios

Then came COVID-19 and its associated challenges, including falling share dividends and uncertain property and rental markets. This has placed further strain on SMSF cash flows and is expected to lead to a wave of diversification as trustees seek to prop up reduced cash flows.

In the recent company reporting season, SMSFs were hard hit by announcements from Australia’s big four banks that dividends were being reduced or suspended – a move that is expected to be mirrored in other key industries including airlines, hospitality and tourism.

Historically, the strong dividend programs of Australia’s blue-chip companies have proved lucrative for SMSFs, reducing the incentive to consider other investment avenues. Unfortunately, it has also led to portfolios being too concentrated and subject to shock from unforeseen events.

Continued market volatility coupled with the flow-on effects of COVID-19 and rock bottom interest rates has Australia’s wealthiest SMSF investors actively seeking opportunities outside of the traditional asset classes.

When savvy SMSF investors consider how they want their portfolio to perform, they don’t just think about returns. A key consideration is the ability to be able to withstand unexpected market events.

Why are SMSF investors turning to fixed income?

We have noticed an increase in SMSFs wanting to lock in returns and reduce risk. These factors are driving a renewed focus on income options like corporate bonds and tailored investments, which offer investors access to equities in a structure that can reduce risk, and which provide an agreed rate of income upfront.

During the first quarter of 2020, we saw a 44% year-on-year increase in bond transactions and a 73% increase in tailored investment transactions. 

(Tailored investments are also known as structured products, as they typically pair a bond and a share or basket of shares to form an income-bearing product with exposure to equity markets).

SMSFs have traditionally been underweight in fixed income, although it tends to be more resilient during times of market volatility. Adding fixed income to an equity portfolio can reduce the unpredictability in portfolio returns without overly hindering performance.

It is also a source of reliable income, because interest payments are guaranteed by the issuer and paid regularly – assuming the company doesn't default. Our clients focus on investment grade local and global companies, with strong balance sheets and a track record of performance and risk management.

Foreign currency and risk management

Another key trend we have observed is a significant increase in foreign exchange transactions, up 77% in the first-quarter 2020 versus the same period last year.

This foreign exchange movement has primarily been into US dollars, for the following reasons:

  • to take advantage of the currency's safe haven status,
  • a belief that the recent Australian dollar rally may not be sustained as long as uncertainty remains the norm.

For SMSFs, investing outside of Australian-denominated assets has not been a widely-utilised strategy. However, investors who hold positions in foreign currency are able to access a wider range of hedging and diversification opportunities.

The simple message to diversify is not a new one, but it is one that has not sunk in for thousands of trustees within the SMSF space due to the appealing lure of equities and dividends.

While COVID-19 presents many challenges, one positive may be that it encourages SMSF investors to look to new investment strategies and investigate the benefits of diversification across asset classes.

 

Leonie di Lorenzo is an SMSF specialist at Citi Australia, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any individual.

For other articles by Citi, see here.

 

RELATED ARTICLES

Six guidelines on how to allocate SMSF cash

The best opportunities in fixed income right now

Which shares and funds do SMSFs invest in?

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Latest Updates

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Shares

Buy the dips?

The Australian stock market has had almost 40 dips of 10% or more since 1920, with many of these triggered by weakness in the US. What would have happened in each case had you 'bought the dip'?

Shaky markets, steady mind

The uncertainty sowed by falling share markets can make investors panic and commit costly errors. Following the advice of an ex Navy SEAL commander can help you stay composed and focus on what matters.

Is it time to pull the plug on EVs?

Electric vehicles have long been championed as the future of transportation. With production slowdowns, cautious consumers, and infrastructure challenges, EVs appear to be hitting a speed bump.

The future of travel

Travel is about to be transformed by a new technological force: AI-powered travel agents. They will independently navigate websites, make decisions, and adjust your travel itinerary – just like a personal assistant.

SMSF strategies

Navigating SMSF property compliance

Property investment in SMSFs is a popular strategy for retirement wealth. Compliance is essential to avoid risks like the sole purpose test, non-arm’s length income, and property development issues.

History tells us that markets are at a high-risk juncture

Every bubble is unique in its form and duration, yet they all share common qualities and stages. As for the current bubble in AI and quality stocks, we’ve had the displacement and the euphoria. Now for the distress.

Sponsors

Alliances

© 2025 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.