Australia’s army of Chief Investment Officers is marching into retirement.

This year’s Vanguard/Investment Trends SMSF survey shows that more than 50 per cent of the $720 billion invested in SMSFs is now being managed by retirees.

The self-managed super sector is a distinct characteristic of the Australian super system and while growth in the number of new funds being established slowed to a 10-year low of 2 per cent last year, the assets grew by more than $50 billion.

The SMSF sector is in many ways blazing a trail for the broader superannuation industry when it comes to the fundamental purpose of superannuation – delivering retirement incomes. Trustees of SMSFs now number more than one million and 36 per cent are retirees, while a further 28 per cent of trustees are in the pre-retiree category aged between 55 and 64.

One of the distinctive features of SMSFs is that all members must be trustees, and trustees are ultimately responsible for the management of the fund. Certainly a lot of SMSF trustees seek professional advice – be it accounting, legal or investment – but there is no escaping the reality that as the trustee of your SMSF, you are also its chief investment officer.

For the first time this year the Vanguard/Investment Trends research, that had more than 2300 responses, asked specific questions about both the level of diversification and the understanding of the concept among trustees.

The questions were added because a long-standing concern with SMSF portfolios has been the perceived lack of diversification.

In 2018 the trustee-provided portfolio data showed 36 per cent was invested in direct shares, 23 per cent in cash, 22 per cent in managed investments (including ETFs and 12 per cent in direct property).

When trustees were asked whether they agreed it was important for an SMSF to be well diversified across different investment types, 82 per cent either agreed or strongly agreed.

However, when asked how well diversified their SMSF portfolio is, currently only 54 per cent said their portfolio was either well or very well diversified.

Drilling down further into what they considered a well-diversified investment portfolio almost two-thirds thought a portfolio of 20 shares got the job done.

Given that the average SMSF, according to the Investment Trends data, has about 17 shares in their portfolio that answer should not be that surprising as it recognises the reality a lot of trustees seem comfortable with.

However, sadly a 20 shares portfolio fails professional tests of diversification and would be more likely classified as a relatively high risk portfolio because of the concentration risk – something that may surprise trustees.

A domestic Australian share portfolio of that size almost certainly would contain banks and miners – the two dominant sectors in the Australian market, but the risks emerge if something impacts those sectors.

What was encouraging from this year’s trustee survey has been the increasing use of managed funds/ETFs and the increased appetite for investing overseas, both of which go towards mitigating some of the risk from the lack of diversification.

But the key question that remains for our retiree Chief Investment Officers, is whether they have the appropriate level of diversification for a portfolio now in pension mode.

Please contact us on |PHONE| if you seek further assistance on this topic .

 Source : Vanguard June 2018

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

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