SMSFs increase diversification using offshore investments

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Self-managed super fund (SMSF) investors know the value of diversifying their assets. But the latest CommSec SMSF Trading Trends report1 reveals a trend towards further diversification using offshore investments.

When it comes to shareholdings, SMSFs are already more diversified than the average investor. SMSFs hold 11.9 stocks, on average, compared to 4.9 stocks held by non-SMSF investors, according to the CommSec SMSF Trading Trends Report dated September 2018, which analyses the period from 1 January 2018 to 30 June 2018.

Now there’s a trend towards offshore investments, the CommSec research has found. While, it’s partly about trying to improve portfolio performance, it’s also because it’s now much easier to access international markets, says Marcus Evans, CommSec’s Head of SMSF Customers.

Offshore investment vehicles

Exchange Traded Funds (ETFs) are one of the main vehicles used to gain international exposure.

CommSec has been monitoring the move from Australian-based ETFs towards international funds and has noticed a burst of activity in the past six months. Internationally-focused funds are now almost 47% of all ETF trades.

“The strength of this shift suggests it’s being driven by a desire for greater diversification, rather than simply the relative performance of different markets,” the report notes.

Listed Investment Companies (LICs) and Listed Investment Trusts (LITs) are other vehicles increasingly favoured by SMSFs to access international markets.

The internationally-focused LICs and LITs have carved out a significant niche, despite the considerable head start enjoyed by long-established domestic LICs, the report says.

Meanwhile, there’s also growing interest in adding direct international shares, says Evans.

“Very few SMSFs are likely to be able to get a diversified enough portfolio by buying individual stocks, because the universe is large. So, they might have an ETF or a fund that’s focused on say, the S&P 500 or the NASDAQ. Then they might want to buy a handful of international shares they’re particularly interested in. That way, they haven’t put all their eggs into one basket,” says Evans.

International trades up 30%

The value of direct international shares traded by SMSFs has grown by 30% over the past six months, according to the report. That’s significantly higher growth than that for non-SMSF investors.

While volumes are still relatively small, direct international share trades among CommSec SMSF clients are now around half of the value of ETF trades. In a more recent trend, this strong US focus is beginning to shift towards emerging markets.

Over the past six months, the largest increases in trading value have been recorded by two Chinese banks and an ETF that offers leveraged exposure to the top 50 Chinese stocks. From a low base, these three securities are now in or just outside the top 25 international stocks traded by Australian SMSFs, the report says.

“In fact, seven of the top eight fastest growing direct international investments by trade value are either Chinese-facing securities, or ETFs shorting US indexes.”

The CommSec report also found the trend for SMSFs to invest outside Australia’s blue-chip stocks is continuing. “SMSF investors have increasingly turned to a more diversified group of mid and small cap companies that have shown strong gains over the past 12 months,” the report said.

ASX20 shares now account for about a third of the total value of shares traded by SMSFs, down from 40% a year ago.

Overall, SMSF trading activity is also on the increase. The total value and volume of shares traded is up slightly.

Important: This article has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Before acting on the information, you should consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice. Any information used in this article is for illustrative purposes only.