The growth of self managed super funds (SMSF) over the past 20 years has been phenomenal. Since the Keating government introduced compulsory super contributions in 1992, Australia's superannuation system has been lauded as one of the best and most advanced in the world. Perhaps obviously, funds in superannuation schemes have grown from a relatively small base to a level that is now having a profound effect on the Australian share and property markets.
Interestingly however, despite being highly regulated and growing strongly, SMSFs are curiously under-analysed by the finance industry as a whole. While many groups target SMSF trustees as potential investors in property or shares, little research appears to be done on where and what SMSFs actually invest in.
To bridge that gap, this week the Australian branch of Credit Suisse, the global financial services company headquartered in Zurich, performed an analysis of the industry to identify the trends and how they relate to investors in the share market.
The analysis found that since 1994, the number of SMSFs has risen from 70,000 to over 510,000 and assets under management now exceed $500 billion. The composition of assets are:
- $220 billion (or 43% of funds) are in the Australian share market,
- $148 billion (or 29% of funds) are in cash (term-deposits), while
- $117 billion (or 23% of funds) are in property.
- The remaining 5% is considered as other.
The $220 billion invested in the share market represents 16% of the total market cap of the Australian equity market, while a further $8 billion per year is added through reinvested dividend payments and new contributions. This is equivalent to 20% of all equity raised on the ASX in 2013 through share placements, IPOs or dividend reinvestment plans.
In terms of the composition of SMSF share portfolios, Credit Suisse found five main takeaways. As the majority of SMSF trustees are near or at retirement age, they are looking for stocks that:
- Deliver high-dividend yields,
- Provide a strong history of dividend growth,
- Distribute franking credits,
- Have a large market capitalisation; and
- Can be identified with.
Similarly, discussions with SMSF advisors confirmed that SMSF trustees were being sold a group of Tier 1 stocks, namely the big four banks; National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), and Telstra Corporation Ltd (ASX: TLS). Advisors note that SMSFs are quick to get out of companies that issue dividend cuts and are strongly against funding capital expenditure for projects.
Foolish takeaway
Credit Suisse believes that investors looking to take advantage of trends in the SMSF industry should concentrate on companies with strong management and a history of delivering good dividend yields and growth, while earnings per share growth is less important. In attempting to get ahead of the game, investors could look for companies poised to move from a growth phase into a consolidation or income phase. Credit Suisse highlighted Australia's big two miners, BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), as the type of companies that may benefit from SMSFs looking for alternatives to the big banks and Telstra. Finally, investors should note that household names are favourites of the SMSF sector and companies such as Coca-Cola Amatil (ASX: CCL), Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW) should continue to see solid demand.
