Persistently low sharemarket returns and higher volatility are forcing many individual investors to rethink their portfolio strategy.
From the end of next month, individuals who are not necessarily “sophisticated investors”, from the regulator’s perspective, will be able to invest up to $10,000 in equity crowdfunding projects such as technology start-up companies and others with high-growth prospects.
According to Will Leitch, chief executive of the Australian Small Scale Offerings Board (ASSOB), the new regulations will open up a new world of investment opportunities for ordinary investors, including SMSF trustees, who may have until now had to rely on managed funds, private and venture capital funds and other co-mingled vehicles to access these sorts of investments.
In its latest newsletter to clients, ASSOB offers seven SMSF trustee ‘hacks’ – tips or ideas – to consider:
Hack 1: Go early, go private
More SMSF trustees are, anecdotally, hunting for micro- and small-cap ASX-listed companies. They are taking high-conviction bets on emerging listed companies and hoping one or two winners will supercharge portfolio returns and compensate for any losses.
But the best returns are often made long before companies list on the ASX. The “smart money” invests in private companies that are working towards an initial public offering (IPO) or trade sale – well before mainstream investors have even heard of these businesses.
If your strategy is to identify high potential small companies, your SMSF must have access to the seed-investing and pre-IPO market.
As Australia’s largest equity crowdfunding site, the ASSOB is the leading platform that connects SMSF trustees with capital raisings in emerging private companies.
Hack 2: Expand your information set
Lots of SMSF trustees rely on stockbroker reports, media stories or do their own research to spot promising small companies. But that information mostly covers listed public companies and even then, company coverage is usually sporadic and limited to better-known names.
If you want to learn about private-company capital raisings, become a member of the ASSOB community through a simple registration process. Registration is free and quick.
Once registered, you’ll receive ASSOB monthly alerts, be able to review all current offers and access useful videos and case studies. Better still, you’ll learn about interesting private companies, some of which could one day list on stock exchanges at higher valuations.
Hack 3: Understand the role of ‘alternative assets’
Large superannuation funds and professional investors understand the role of alternative assets, such as venture capital or private equity, in portfolios. These assets are less correlated to traditional asset classes, meaning they do not move as much in the same direction.
A benefit of including alternative assets in SMSF is the potential for improved portfolio diversification. Consider a SMSF that holds a dozen Australian shares; if the sharemarket falls, it’s a good bet all the portfolio’s shares will fall. But the value of private, unlisted companies in the portfolio might be unchanged or have fallen far less.
The point is: adding unlisted private companies to a SMSF through sensible asset-allocation strategies can enhance portfolio diversification. With that comes reduced risk and scope for better risk-adjusted returns.
Hack 4: Invest in growth sectors
Most SMSFs have a multi-year or multi-decade investment horizon, so they need to invest in sectors with strong long-term growth prospects. But banking and mining stocks dominate the ASX by market value. The ASX offers far less exposure to tomorrow’s growth industries, such as information technology, clean tech, life sciences or financial tech (fintech).
Many companies that have successfully raised capital through ASSOB have come from these sectors. If your SMSF wants to spot emerging technology companies or promising biotechs, it needs exposure to private companies – and an ASSOB registration.
Hack 5: Consider tax concessions
Government legislation can provide favourable tax concessions for investors in companies that meet certain innovation tests. Some investments in early-stage innovation companies are capital-gains-tax free and/or provide significant tax offsets.
The Federal Government has changed the tax framework to drive higher rates of innovation and help early-stage growth companies in Australia attract capital. That’s good news for investors, such as SMSFs, that can get in early when tax concessions are on offer.
SMSFs seeking tax advantages that can boost investment returns should consider private companies in growth sectors – a market ASSOB has long experience in.
Always seek advice from your accountant or financial adviser about tax concessions on offer and your eligibility, or do further research of your own, before investing.
Hack 6: Consider core/satellite SMSF strategies
Traditional asset-allocation approaches have become less effective for many SMSFs since the global financial crisis. Spreading SMSF capital across asset classes may not have reduced risk during financial crises and this approach may no longer deliver sufficient returns for some SMSFs.
Consequently, more SMSFs are using core/satellite portfolio strategies. That could include using low-cost index funds in the portfolio core to replicate market returns, and having a small group of high-conviction portfolio “satellites” to boost returns.
For example, a SMSF trustee might allocate a small proportion of assets to alternative investments, such as venture capital, in the satellite component. Risk is spread across several private companies and the allocation is small in the scheme of the overall portfolio.
That way, the portfolio benefits if the valuation of a private company increases several fold, but has modest exposure to an individual company failure (due to low investment in each, relative to the overall portfolio).
Hack 7: Go with the equity crowdfunding platform you can trust
Investing in earlier-stage private companies is, by its nature, speculative. Beware adding unnecessary risk by investing in private companies through equity crowdfunding platforms that have little history or lower governance and reporting standards.
ASSOB has raised over $147 million for 176 companies and has around 50,000 registered investors – by far the largest platform of its kind in Australia and with the highest governance standards and processes.
Not every company on the ASSOB platform will succeed – that is the nature of entrepreneurship and early-stage investing. But SMSFs can invest with confidence through ASSOB knowing we take steps to minimise risks in our platform, wherever possible.
Note: Shed Connect, publisher of The Rub, is a distribution partner of ASSOB.