Diversification for the Retail and SMSF Investor

27 Apr 2016

We are witnessing a systemic change in how investment strategies need to be approached to ensure both growth in the accumulation stage and protection during the vesting stage. Gone are the days when the retail or self-managed super fund (SMSF) investor could invest surplus cash in buying the big mining and bank stocks, and be guaranteed a robust and stable dividend cheque twice yearly.

The self-managed superannuation market has grown and continues to grow and is estimated to represent around 30% of the total superannuation market. The changed market conditions being experienced by the investor are being driven by:

While a slowing economy and low commodity prices could, arguably, be merely cyclical in nature, the last two issues listed, represent a more fundamental and long-term change.
There has been much written regarding the constant chasing of yield in this low interest rate environment. But there are dangers in chasing yield and returns particularly in an environment that requires a long-term change in approach. So what can the retail/SMSF investor do?

The first thing they can do is ensure that their portfolio is well diversified. While many may think they are currently running a well diversified portfolio, the reality is that the bulk of SMSFs comprise long equity positions, some fixed holdings and cash. The SMSF can immediately improve diversification by taking advantage of products that the market has already developed such as exchange traded funds, taking some currency exposure, or increasing exposure offshore. Indeed there are some SMSFs that are diversified in this way. Much depends on the financial advisor and the access that advisor has to information and investment opportunities. If the SMSF does not have a financial advisor and many do not it would be an idea to engage a good one.

What about impact investing as an alternative investment strategy? Impact investing provides investors an opportunity to put their money to use in ways that make financial returns and also benefit society. That is not is say the investment is without risk. However, in allocating some small part of an SMSF portfolio toward an impact investment, the portfolio achieves a further level of diversification. It represents a viable asset allocation where returns are not subject to the same issues as those impacting a long equity portfolio.

The report released by the Financial Systems Inquiry in late 2014 supported impact investment. To date there have been two social benefit bonds in Australia that have raised funds in the open market. The difficulty for the retail investor is that these investments have been restricted to the wholesale market. That means that either the SMSF invests in a fund or their financial advisor can access an allocation. So, product development is required to enable retail investors and SMSFs access to impact investment opportunities. This necessarily involves greater regulatory hurdles for the issuers to overcome. The UK has issued social impact bonds designed for the retail investor. The US has issued new guidance to allow private pension funds to consider impact investments. No doubt retail product will become available in Australia in the future.

What is really required is a realisation by retail and SMSF investors that the long used investment strategies of the past may just not be a safe bet to secure retirement savings in the future. Philosophically, this requires a mindset shift in focus and a move out of the investor comfort zone. There are opportunities abound for the proactive, entrepreneurial financial advisor servicing this sector.

Author Bio
Amanda Dobbie is the CEO of WiBF. Prior to this role, she was Managing Director of Bloomberg Australia. Follow Amanda on Twitter @DobbieAmanda