Self-managed super forecast

Investment strategies will have to change for DIY super funds, and SMEs need to know their options. By MICHAEL LAURENCE.

By Michael Laurence

Thousands of self-managed super funds – the favoured means of investment for SME owners – will borrow to invest over the next 12 months. And their investments in residential property, the premises of members’ businesses, and listed investment companies will rise significantly.

The funds will become more opportunistic in their investment practices, building up stores in cash management trusts to take advantage of investment opportunities.

Yet despite the expected swing to geared investments in accordance with changes to super law last week, self-managed funds will take a more cautious approach to the sharemarket, shying away from more speculative stocks to concentrate on blue-chips.

The staggering flow of contributions into self-managed funds will continue at a remarkable rate in 2007-08, yet at a somewhat slower pace than last financial year when self-managed fund assets leapt by 30%, to $288 billion, in the lead-up to the new super regime, according to the Australian Prudential Regulation Authority (APRA).

These forecasts for super funds over the next 12 months and beyond are based on interviewing professional advisers to self-managed super and, in part, on a new survey by specialist researcher Investment Trends of more than 2100 self-managed funds.

Here are five pointers to what’s coming up for self-managed funds:


Expectations: Many more self-managed funds will be borrowing to invest under stringent new provisions.

Why: Amendments to super law unambiguously allow self-managed funds to borrow to invest. The amendments permit funds to override the long-standing provision in super law barring the borrowing to buy investments.

Until now, many fund trustees were uncertain about how the borrowing ban operated in practice because of various investment and financial products, including instalment warrants, being marketed.

Under the new law, a lender cannot make a claim against any of a fund’s assets in the event of default – other than against the geared asset – and the geared asset must be held in trust until the fund makes its final payment.


Expectations: SME owners will increasingly arrange for their self-managed funds to own the premises of their businesses. As required under super law, the businesses will pay a commercial rent to their funds for use of the premises – and that rent will be concessionally taxed within the funds.

Why: The recent amendments to super law that clearly allow funds to borrow to invest should boost this trend. Further, changes to the Bankruptcy Act from July mean that no assets in super – these might include business premises – are accessible to trustees in bankruptcy provided contributions were not made to defraud existing or future creditors.


Expectations: Investment Trends’ latest survey of self-managed funds found a strong interest in residential property investments – higher than in past surveys.

Why: This seems to reflect expectations that markets in the eastern states are in recovery. The borrowing-to-invest amendments in super law will also encourage more funds to invest in residential property.


Expectations: Self-managed funds will increasingly use investments in listed investment companies as a foundation for their portfolios.

These companies, such as Argo and Australian Foundation, hold massive, widely diversified equity portfolios. Argo, for example, owns shares in about 180 listed companies.

Why: Investment Trends’ survey found that self-managed funds have a fast-growing interest in listed investment companies. And self-managed fund administrator and adviser Dixon Advisory also reports that more of its clients are turning to these investments.

Mark Johnston, a director of Investment Trends, says self-managed funds have had considerable success with listed property trusts and this has given them more confidence to move into listed investment companies.

Investment Trends reports that funds surveyed had markedly increased their exposure to listed investment companies over the past 18 months – albeit from a low base. About 13% of funds surveyed had shares in listed investment companies – more than double the percentage shown in the previous survey.

Investment Trends found that more self-managed funds had early this year begun to reduce their holdings in smaller, more speculative stocks to shift more into blue-chips. And this support of blue-chip stocks will grow, according to the survey.


Expectations: Self-managed funds will continue to reduce their debenture holdings in favour of cash. Investment Trends also found that this switch was under way before the recent sharemarket correction.

Why: Self-managed funds have a growing policy of building up their cash to grab investment opportunities that may arise – such as in the recent sharemarket correction.


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