SMSFs need to look to foreign shores
25 October 2013
The local financial advisory industry, which invests Australia's super assets, has a heavy bias towards the top 50 local shares. They do not look much at alternatives such as gold -- most advisers use platforms that do not even consider such "exotic" options --it is not possible to invest in bonds at the retail level ($500,000 is usualy the minimum) so that leaves only buying units in wholesale funds. Currencies do not even enter into the discussion. So that leaves buying term deposits, cash -- and high yielding shares, especially the banks.
It is a pretty small set of options and poses real issues for diversification. SMSF investors are, at least in theory, less shackled (although that freedom can carry dangers). As the AFR points out the size of the stock market, Australia's superanuation pool and the annual economy are all about the same:
"Give or take the odd hundred billion dollars, the size of Australia’s sharemarket capitalisation, its retirement assets, and the gross domestic product of the nation are all around the same value. Our gross domestic product stands at $1.47 trillion, the ASX All Ordinaries Index is valued at $1.5 trillion and the estimated size of our superannuation assets is $1.6 trillion and growing."
This leads to an important issue -- the need to diversify offshore. It is especially an issue with the $A almost at parity with the $US:
"Whereas professionally managed funds have around 18 per cent of their investments in foreign equities, the $500 billion self-managed sector has only one-third of 1 per cent invested in offshore stocks. The issue of the currency is nothing new, but changes to the financial system architecture and the growing need to invest funds abroad could exacerbate its impact in the future. Australia’s unique circumstances, in which billions of dollars of capital is imported and billions more is sent offshore, will no doubt be evaluated by whoever the Treasurer appoints to review the linkages of our financial system."
Buying offshore when the $A is high can produce a double return (although of course nothing is certain). If an investor buys into the US stock market or other stock markets, they will get a higher return if the $A falls. And, hopefully, they might get a return from a rising foriegn stock market. Plus they will be exposed to a wider range of industry sectors. The ASX is heavily skewed towards the bank and retail oligopolies and a mining sector that semes to be shrinking. Looking offshore can make a great deal of sense.