How to get rid of poor SMSF returns once and for all

What shares should SMSF investors buy for the best returns over the 10 years ahead?

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Reading through The Australian newspaper the other day I noted that Credit Suisse has compiled a list of the top 10 most widely held ASX stocks by percentage of market capitalisation for cashed-up SMSF investors.

Below is a list of those stocks and the approximate percentage of the total market cap held by SMSF buyers according to Credit Suisse estimates.

  1. Telstra Corporation Ltd (ASX: TLS) around 18% of its market cap held by SMSFs.
  2. Woodside Petroleum Limited (ASX: WPL) around 17% of its market cap held by SMSFs.
  3. Rio Tinto Limited (ASX: RIO) around 15% of its market cap held by SMSFs.
  4. National Australia Bank Ltd. (ASX: NAB) around 14% of its market cap held by SMSFs.
  5. BHP Billiton Limited (ASX: BHP) around 14% of its market cap held by SMSFs.
  6. Wesfarmers Ltd (ASX: WES) around 13% of its market cap held by SMSFs.
  7. Santos Ltd (ASX: STO) around 13% of its market cap held by SMSFs.
  8. Westpac Banking Corp (ASX: WBC) around 12% of its market cap held by SMSFs.
  9. Australia and New Zealand Banking Group (ASX: ANZ) around 12% of its market cap held by SMSFs.
  10. CSL Limited (ASX: CSL) around 12% of its market cap held by SMSFs.

Now, I understand that SMSF investors are looking for income and security in retirement which means their natural focus is on the large-cap end of the market, but I still think the above list belongs to a time 10 to 20 years ago.

The world has changed since 1997 and SMSF investors would (in my opinion) be better off cutting out some of the stocks on this list entirely to focus on the growth of the digital economy to deliver a blue-chip retirement of capital growth and dividends.

More specifically, I wouldn't hold businesses leveraged to the long-term direction of the oil price in an SMSF portfolio.

The fundamentals of rising supply and falling demand growth over the long term point to lower oil prices as new extraction technologies in the U.S. bring more supply online at a cheaper cost of production, while the publicly-subsidised shift towards battery powered vehicles and alternative energy sources like solar is gaining ground outside Australia.

The accelerating tilt away from fossil fuels may not be so obvious in Australia, but in Europe and North America it's real.

Structural change means oil's in a potentially indefinite bear market and I'm betting the inflation-adjusted oil price is lower in 10 years' time than it is today.

China's construction super-cycle is also over (permanently) which means iron ore miners like BHP and Rio Tinto may find their profits, dividends, and share prices going nowhere fast over the next 10 years.

So where's an SMSF investor to look for better returns in the decade ahead?

According to Deloitte, Australia's digital economy is a now a bigger sector than agriculture, retail, or transport, with the global digital economy growing far quicker than traditional industries.

I expect digital advertising businesses REA Group Limited (ASX: REA) and SEEK Limited (ASX: SEK) could both join the S&P/ASX50 Index of Australia's 50 leading companies over the decade ahead to replace the likes of Santos Ltd (ASX: STO).

While investors wanting to swim with the current in terms of increased investment in renewable energy while collecting healthy dividends along the way should consider S&P/ASX50 member Macquarie Group Ltd (ASX: MQG).

Macquarie has just flagged a $1 billion share buyback and if the bank's buying the stock at current levels that's as good a sign as any you'll ever get that it still represents good value.

It's also notable that CSL Limited (ASX: CSL) is the only business from the  healthcare sector to feature on the list. That's a surprise given the dependable nature of the healthcare sector, with CSL returning 351% plus dividends over the past 10 years.

Whereas SMSF favourite the NAB has lost 26% of its value in the same period, which shows how focusing on dividends alone (even if you're in retirement) is a common SMSF investment mistake to avoid.

Motley Fool contributor Tom Richardson owns shares of CSL Ltd., Macquarie Group Limited, REA Group Limited, and SEEK Limited. You can find Tom on Twitter @tommyr345 The Motley Fool Australia owns shares of National Australia Bank Limited, Telstra Limited, and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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