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For a smoother path to investment success, diversify

The word diversification crops up in many contexts. You might hear a business person talk about diversifying revenue streams, or a footy fan mention a team’s need to assemble a group of players with diverse skills.

         

 

In a variety of arenas, people agree that diversification can improve chances for success. Investors are no different. In a recent survey of nearly 2,000 self-managed super fund investors, about 76 per cent agreed that it is important for their SMSFs to be diversified across different investment types. Yet only 39 per cent say their portfolio is very well or well-diversified.*

That’s not especially surprising. Closing the gap between theory and reality is always a challenge. Just as it’s easy to promise yourself to eat healthily but still sit down to steak, chips and ice cream too often, it’s easy to agree on the wisdom of diversification but not be certain that your portfolio achieves that goal.

Diversification protects against the risk that a share, bond or asset class will fall in value and generate losses that will prove difficult to recover from. Today’s soaring tech share could be tomorrow’s bankruptcy. By expanding the number and type of shares and bonds you own, you increase the odds that parts of your portfolio will hold their value when others fall.

A diversified portfolio is divided among asset classes such as shares, bonds and cash to achieve investors’ required returns within the limits of their risk tolerance. This formula will vary depending on an individual investor’s age, risk tolerance, time horizon and goals.

As you examine your investments, keep these diversification concepts in mind:

  • Your asset allocation, the way you divide your portfolio between different asset classes, is one of the biggest drivers of long-term performance. In other words, the specific shares or bonds you choose matter less than how much of your portfolio you devote to each of those asset classes.
     
  • Bonds are a crucial way to diversify against the risk of the share market. A portfolio invested 100 per cent in shares generated an annualised average return of 10.5 per cent over 80 years, according to Vanguard research**, but lost more than 40 per cent in its worst year. In contrast, a portfolio divided evenly between shares and bonds returned 8.3 percent on average per year, but lost only about 20 per cent in its worst year.
     
  • Investors should diversify both across and within asset classes. Once you have decided how much to put in each asset class, you should figure out how much to put into subsets of those asset classes. A diverse share portfolio, for example, should include allocations to small, medium and large companies and include international shares. 
     
  • Remember to examine your entire portfolio. If you have multiple super, or other investment accounts, consider them as a whole.
     
  • Once you have chosen an asset allocation, the ups and downs of financial markets may throw it off course. Remember to rebalance to your initial allocations to stay on course or choose a fund that does this for you.

*2019 Vanguard/Investment Trends SMSF Report
**Vanguard Portfolio Construction for Taxable Investors

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
13 August 2019
Vanguardinvestments.com.au

 

SMSF advice appetite strong, says ASIC

A new ASIC report has highlighted demand for further advice on the specifics of SMSFs among the Australian population, particularly among those who have a financial planner.

         

 

The report, titled Financial advice: What consumers really think, found that 25 per cent of consumers who had recently received financial advice wanted more guidance around SMSFs.

Around 50 per cent of financial advice customers also wanted advice on retirement income planning, while around 45 per cent wanted guidance on growing their superannuation, highlighting the potential value for accountants in establishing a referral partnership with advice businesses to tap into this demand.

Within this group of consumers who had seen a financial adviser, 45 per cent chose their adviser based on their level of experience, while about 43 per cent chose them based on their ability to understand the consumer’s personal goals.

An additional 43 per cent selected their adviser as they were someone the consumer was comfortable talking to.

However, demand for SMSF advice was not limited to those who had seen a financial planner, with 15 per cent of the broader consumer population also indicating a desire for guidance around self-managed funds.

This broader group selected their adviser based primarily on their reputation (38 per cent), their experience (41 per cent) and their ability to talk to the consumer in a way they could understand (36 per cent).

Across all respondent groups, the majority indicated that the adviser would need at least five to 10 years in the industry to be trustworthy, the report said.

 

 

Sarah Kendell
28 August 2019
accountantsdaily.com.au

 

Valuations key to avoiding NALI restrictions

SMSF trustees may find properties within their fund caught under changes to non-arm’s length income rules if the property is involved in a related-party transaction and is not professionally valued, according to a leading SMSF law firm.

         

 

Speaking at a seminar in Sydney on Wednesday, DBA Lawyers’ Shaun Backhaus said it was important that trustees and their advisers not rely on informal valuations from real estate agents if they were acquiring or disposing of a property through a related party.

“When you get the real estate agent’s appraisal, it’s typically going to be a two- or three-line letter saying, ‘Based on my appraisal, the value is this’,” Mr Backhaus said.

“I would bet that half the time, there’s also an email or text message going to your client or, even worse, you, saying, ‘How much do you want me to make this?’ So, I think that’s not really going to cut it.”

Mr Backhaus explained that in disputed cases — such as when there was a suspicion that a property had been acquired from or by a related party at less than market value — the ATO would review the instructions given to the valuer by the trustee or adviser.

If the transaction was found not to have occurred at arm’s length, income earned from the property would be subject to 45 per cent tax as per the new measures currently before parliament.

Even those who had been diligent in their instructions to their real estate agent could be caught if the valuation did not appear to be “based on objective and supportable data” as per the ATO’s guidance on the issue, Mr Backhaus said.

“If there’s an acquisition from a related party and all you’ve got is that agent appraisal and [the value has] shot up later, the ATO could say, ‘No, based on these things in the media which the agent didn’t take into account, the value should have been more’,” he said.

“I recognise clients aren’t going to want to get a $2,000 appraisal very often, but if there are any related-party transactions involved, they need to get a valuation.”

 

Sarah Kendell
14 August 2019
smsfadviser.com

 

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Your Accountant

Heed restrictions on downsizer contributions

Downsizer contributions can be a valuable strategy for members who are retired or have reached their contributions caps to tip further funds into super, but advisers need to be aware of the restrictions around which property sales are eligible, according to a technical services expert.

         

 

Downsizer contributions can be a valuable strategy for members who are retired or have reached their contributions caps to tip further funds into super, but advisers need to be aware of the restrictions around which property sales are eligible, according to a technical services expert.

Fitzpatricks head of strategic advice Colin Lewis told SMSF Adviser the contributions were an ideal strategy for those who were older, no longer met the work test and couldn’t contribute any more to super through other means, as they did not count as a non-concessional contribution.

“It’s great for people who might not be able to contribute to super because they are aged 75 or more, or no longer working, or perhaps they’ve got too much in super already,” he said.

Mr Lewis said some of the common queries from advisers about the contributions were around eligibility and specifically the type of property being sold, as it made a difference to whether the contribution would be accepted.

“You get some weird and wonderful arrangements where people think they can do it — for example, someone might sell an investment property and think they can contribute, or they might subdivide a parcel of land into six but in that case they haven’t actually sold a house,” he said.

Mr Lewis clarified that downsizer contributions were only eligible if they were proceeds from a physical dwelling that was or had been a member’s main residence. 

However, beyond this there was no requirement for the member to be actually “downsizing” by moving to a smaller or lower-value home. 

“The ability to make a downsizer contribution from age 65 hinges on making the contribution within 90 days of settlement of a property that was owned for at least 10 years which qualified for the main residence exemption, so you could sell an investment property that was once your home and that would qualify,” he said.

“So, you don’t have to sell the last dwelling you’ve lived in to be able to qualify for it, but then again, you can’t just sell a straight-out investment property.”

Mr Lewis said he had also received queries about the effectiveness of the strategy for members that had already reached their transfer balance cap, but said contributing funds to accumulation stage accounts was still a tax-efficient option.

“People think if they’ve started an account-based pension and used their $1.6 million then why put more money in, but how else are they going to invest that money?” he said.

“If they are investing it outside and paying tax on their earnings, they are better off having it in accumulation phase even if they can’t get it into retirement phase.”

 

 

Sarah Kendell
30 August 2019
smsfadviser.com

 

SMSFs attract younger members

Given that self-managed super funds (SMSFs) hold more than half of the retirement dollars in super, it is easy to assume that self-managed super is dominated by older members. Not so.

         

 

In reality, a high proportion of investors establishing SMSFs are middle-aged or younger. And it seems that the average age of new SMSF members is getting younger.

The tax office's latest quarterly SMSF report shows that more than 15 per cent of investors who established SMSFs in the March quarter of 2019 were aged under 34, while a third were aged 35-44.

Indeed, 35-44 is the peak age group, by far, for establishing a self-managed fund.

Further, 80 per cent of investors who established SMSFs in the latest March quarter were under 54. And the 2019 Vanguard/Investment Trends SMSF Report notes that SMSFs are being established at lower average ages in recent years.

Other tax office statistics indicate that the age range of SMSF members – no matter whether the funds have existed for many years or setup in recent months – is widely distributed. At June 2018, 65 per cent of SMSF members were under 65.

A key financial decision for many fund members is whether to switch from a large APRA-regulated fund to an SMSF. Even the strongest advocates of self-managed super would agree that SMSFs are not for everyone – regardless of age.

Before setting up an SMSF

Some of the things to consider when deciding whether to setup an SMSF include:

  • Super balances: Unavoidable costs of running an SMSF can handicap the returns of low-balance funds. Are your super savings large enough for an SMSF to be financially viable or should you wait for a few more years until your savings are higher?
  • Knowledge: Do you have enough knowledge about sound investment practices and the legal obligations of SMSF trustees? And are you willing to take specialist professional advice when needed? (Considerations here include trustee duties, investment risks, likely returns, liquidity, investment diversity, risks of inadequate diversity and investment selection.)
  • Time: Are you willing to set aside the time necessary for running an SMSF? Most SMSF trustees receive at least some professional assistance, ranging from fund administration to full financial planning.

Creating a new SMSF portfolio

A fundamental task for new SMSFs is, of course, to create an investment portfolio in accordance with their chosen asset allocation. (A diversified portfolio's asset allocation – the proportions of its total assets that are invested in different asset classes of mainly local and overseas shares, property, fixed interest and cash – spreads risks and opportunities.)

More SMSFs are taking a “core-satellite” approach to the creation of their portfolios. With this approach, the core of a portfolio is held in low-cost traditional index funds or ETFs tracking selected indices with smaller “satellites” of favoured directly-held investments (such as shares) and/or actively-managed funds.

The 2019 Vanguard/Investment Trends SMSF Report shows that of the estimated 393,000 investors holding ETFs in April this year, almost a third were SMSFs.

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
06 August 2019
Vanguardinvestments.com.au

 

 

 

 

 

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ATO releases ‘welcome guidance’ on death benefit income streams

The ATO has provided guidance on what action SMSF trustees should take where they have failed to meet the minimum pension payment requirements for a death benefit income stream.

         

 

In an online update, the ATO has provided clarification on the interaction between compulsory cashing requirements when a member dies and the requirement to pay a minimum pension amount each year.

The ATO explained that where a member of an SMSF dies, their benefits must be cashed by the fund as soon as practicable as part of the compulsory cashing requirements.

In some cases, a dependant beneficiary may choose to receive a death benefit income stream or pension, or they may receive one automatically in the case of a reversionary pension, the ATO said.

“Pensions paid from super, including death benefit income streams, have a minimum pension payment requirement, and a number of questions have recently been raised by the SMSF sector around the interaction between compulsory cashing requirements when a member dies and the requirement to pay a minimum pension amount each year,” it said.

“Cashing a death benefit in the form of a pension only satisfies the compulsory cashing requirements as long as the interest continues to be cashed in that form. Therefore, if the pension ceases because the minimum amount hasn’t been paid, the trustees may have contravened the Superannuation Industry (Supervision) Regulations 1994 (SISR).”

However, where a contravention has occurred, if trustees act swiftly, there are steps that can be taken to ensure that death benefits are still considered to be “cashed as soon as practicable”, the ATO stated.

One of the ways this can be achieved is by immediately cashing the benefit in the form of a new retirement phase income stream as soon as they become aware of the breach, the ATO said.

It could also be achieved by cashing the benefit in the form of a lump sum, either as a single lump sum or as an interim and final lump sum, or rolling over the interest that supported the death benefit income stream pension to another complying super fund for immediate cashing as a new death benefit income stream.

The ATO clarified that these options will only prevent future contraventions of the SISR and won’t remedy the breach that’s already occurred for failing to meet the compulsory cashing requirements.

“As long as one of these actions is taken immediately, the commissioner will accept the trustee is meeting on a go-forward basis the requirement to cash the benefits ‘as soon as practicable’ and will not therefore have further contravened the SISR. Failure to resolve the matter may have significant compliance consequences,” it said.

Colonial First State executive manager of technical services Craig Day said that, before this latest guidance from the ATO, SMSFs were left in an uncertain position because where the surviving trustee had failed to pay the minimum in that year, they had technically failed to satisfy the requirement that the income stream had continued to be paid.

“One way you could read the legislation is that that would actually require the payment of the reversionary pension as a death benefit out of the system, which wouldn’t be an ideal outcome due to an inadvertent breach,” Mr Day said.

Mr Day said while the ATO has confirmed that if you fail to pay the minimum, then you have breached the compulsory cashing requirements under regulation 6.21, they have also made it clear that they are happy to allow the trustee to commence a new pension, and that would still be considered to be a death benefit pension in that surviving spouse’s name.

“That is very much welcome because it means if we’ve got a client that’s made an inadvertent breach, then that doesn’t automatically require the payment of the death benefit lump sum out of the system, which wouldn’t be a great outcome,” he explained.

The ATO has also confirmed in the guidance, he said, that where the underpayment is small, or the result of an error, the trustee may be able to self-assess whether they can apply the exception to treat the fund as having continuously paid the pension, despite the underpayment.

“If the exception can be applied, the fund has not breached the SISR,” the ATO stated.

Mr Day said SMSF trustees also need to be aware that from a transfer balance cap reporting perspective, if the underpayment of a pension does happen and the pension is ceased, then they do need to report the debit in relation to the pension ceasing, but they are only required to report the debit from the time they become aware that the fund failed the pension standards.

“So, in the context of failing to pay the minimum, you would be reporting the debit effective at the end of 30 June and the value of the debit would be the value of the pension at that time, so even though the pension stopped at the beginning of the year, the value of the debit is based on the circumstances as of the end of the year,” he said.

 

 

Miranda Brownlee
17 July 2019
smsfadviser.com

 

What falling interest rates mean for investors

The Reserve Bank of Australia's official cash rate is at a record low of 1 per cent, with further cuts predicted as the central bank strives to offset perceived economic weakness.

           

 

In the United States, the outlook is similar. The U.S. Federal Reserve, which in January was expected to raise rates, is now on a path to lower them.

What has changed so quickly, and what does it mean for investors?

Around the world, economic uncertainty has risen on concerns that a trade war might limit growth. In addition, job-market indicators signal weakness.

In Australia, unemployment is above targeted levels, and wage growth has hovered at a relatively sluggish 2.3 per cent, In the United States, where unemployment remains near the lowest level in 50 years, strong job numbers have not generated significant wage increases. That may explain why inflation, the traditional target of central banks, has lingered below expectations. Workers can't spend money they don't have. Those are the immediate conditions that shifted the conversation from rate hikes to cuts as “economic insurance.”

Over the longer-term, the 2008 financial crisis modified central bankers' approach to monetary policy. Years of low interest rates have pumped money into the global economy but have not fueled inflation. Inflation's vanishing act, combined with persistent economic lethargy, has tilted central bankers' bias toward quick action.

Over the short term, reduced interest rates tend to boost share returns because investors believe monetary stimulus will improve economic prospects. Lower interest rates also push investors to seek the higher relative return of shares.

Those are generally short-term effects, however, and investors should focus on the long run. While interest rates may potentially represent an opportunity to refinance your house, they should not cause you to veer from a carefully planned investment strategy.

Changing rates do reinforce some long-term investing principles that can be helpful to remember to maintain discipline:

  • Don't reach for return. Vanguard forecasts that share returns are likely to remain at about 4 per cent to 6 per cent, below historical averages, for the next decade. While this is a reasonable return, it may tempt some investors to increase risk in the hope of greater reward. Vanguard research suggests that strategies, such as investing in lower-quality bonds that pay higher rates of interest, rarely pay off. Instead, sticking with a low-cost, diversified portfolio that captures returns from global shares and bonds and matches your risk tolerance provides the best chance for investment success.
     
  • Control what you can. You can't control financial markets, so focus on what you can control. If you are concerned about lower returns, consider saving more or working longer. Keep investment costs low to avoid eroding returns.
     
  • Understand the role of bonds in your portfolio. Bond prices fluctuate with interest rates, but remember that income is only one reason to invest in bonds, and not the most important one. Bonds' bigger role is to protect against volatility in the share market. For example, in 2008, the Australian share market fell 38.9 per cent; Australian fixed interest, as measured by the UBS Australian Composite Bond Index, rose 14.9 per cent.

Interest rates will always move up and down. Don't let your investment strategy bounce around with them.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
30 July 2019
vanguardinvestments.com.au

 

Insights from the 2019 Vanguard / Investment Trends SMSF survey

The annual Vanguard/Investment Trends SMSF Report collates responses from almost 5,000 SMSF trustees and close to 300 financial planners who advise SMSFs, providing a clear snapshot of the priorities and issues facing SMSF trustees today.

         

 

This year’s report reflects a period of uncertainty for SMSF trustees recently, particularly in the lead up to the federal election with the Australian Labor Party’s proposed policy to remove refundable franking credits from Australian shares.

The SMSF sector represented around $747 billion in retirement savings as at March 2019, growing at a slower pace than the preceding 12 months following the impacts of recent industry events, this compared with $1.8 trillion invested with APRA-regulated super funds.

The report delved into attitudes to other proposed changes to SMSF regulation including the increase to the maximum number of members from four to six, which more than half of advisers saw largely as a positive move, where trustees were unsure of the impact.

The proposed ban on borrowing for investment property was rejected by the financial advisers surveyed, with a majority saying it would have a negative impact on the industry. Nearly a third of trustees agreed with this sentiment.

The total number of SMSFs grew to 598,000 at the start of the year, up just two per cent from the same time last year. The average SMSF balance is $1.2 million, with report findings over recent years showing a trend of lower fund balances and younger trustee ages at the time of establishment.

Despite declining establishment rates, there is still significant appetite among Australians to set up an SMSF, with one in five super fund members planning on setting one up in the future, citing greater control and better returns as the main motivators.

SMSFs are defensive and aiming to diversify

In an uncertain investment climate, more SMSF trustees are taking a defensive stance in their asset allocation.

The report showed investors’ outlook for market returns was low at 1.4 per cent – this prediction sat well below the expectations of many economists, including Vanguards (who have a 10 year outlook for Australian equities of 4.5-6.5%).

Despite this, SMSF trustees remained most inclined to invest further in individual bluechip shares, with 54 per cent citing this as a likely investment choice over the next 12 months.

SMSFs’ allocation to cash increased slightly over the past year to 25 per cent, largely at the expense of unlisted managed funds which dropped by two per cent.

While many SMSFs have adopted a defensive mindset, their appetite for diversifying investment products has increased.

This is highlighted by SMSFs’ use of exchange traded funds (ETFs) with the number currently investing, or planning to invest in ETFs in the year ahead, surging from 140,000 to 194,000 in the last 12 months.

The findings also showed that SMSFs are seeking greater exposure to overseas assets, especially through ETFs, however 52 per cent of respondents cite lack of knowledge about overseas markets and currency risk as the top barriers to obtaining more exposure.

Looking forward, while building a sustainable income stream remains a key investment goal for many SMSFs, a growing proportion (15 per cent) say protecting their assets against market falls will be their key focus for the year ahead.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
16 July 2019
vanguardinvestments.com.au

 

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