How SMSFs distort the equities market

Elmer Funke Kupper
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(Pictured: Elmer Funke Kupper)

by Greg Bright

An hour or so after mFund was launched, with some fanfare, at the ASX last Thursday (May 8), Tyndall Asset Management completed its annual advisor roadshow. At both events, in Sydney, the continuing SMSF phenomenon got an airing.

While just a small part of its presentation, Tyndall demonstrated how the pattern of investing adopted by the average SMSF trustee is distorting the equities market and how value managers, such as Tyndall, could exploit it.

At the ASX, before about 100 fund managers, media and others, Elmer Funke Kupper ASX chief executive, thanked SPAA’s chief executive Andrea Slattery for her attendance and hoped the SMSF sector would be an important client base for mFund, which celebrated its first transaction earlier in the week – the purchase of some units in an APN Funds Management product through broker Bell Direct. The first third-party registrar to process an application last week was FundBPO, a part of the MainstreamBPO administration group.

John Brogden, the chief executive of the FSC, who also spoke at the launch, said that rather than viewing SMSFs as a “leakage” the retail sector viewed them as another opportunity to provide its services, helped by the mFund initiative.

If mFund takes off as hoped, stock brokers will represent a new distribution channel for funds alongside the planner and direct networks. Systems providers, third-part administrators and other service providers apart from managers will benefit.

The problem has been that SMSF trustees tend not to buy managed funds; not at least to the same extent as other retail investors. They prefer going direct to stocks. The big question is: will this change?

At the Four Seasons Hotel, before about 150 advisors, media and others, Tyndall portfolio manager and senior analyst Jason Kim included a couple of slides in his presentation on SMSFs. The first showed their big overweights to direct shares and cash and the second showed how the trend to direct share purchases by SMSF trustees was actually accelerating.

Sourced from ATO and Credit Suisse estimates, Tyndall says the aggregate asset allocations for SMSFs, as at September 2013, is 33 per cent direct domestic equities, 29 per cent cash, 24 per cent property and 9 per cent “indirect equities” (managed funds).

Using ATO, Credit Suisse estimates and Bloomberg data, the growth in direct share buying by SMSFs was shown to have a net inflow rate which rose from about 4.6 per cent in 2009-10 to about 7.8 per cent in 2012-13.

The nub of the problem for fund managers, their advisor clients and their big super fund clients, however, may be music to the ears of equity analysts at those fund management firms.

Kim said that feedback from advisors who Tyndall dealt with indicated that a typical share portfolio for an SMSF involved just 10 or 12 stocks, or fewer, with heavy concentration among the four banks, Woolworths, BHP and perhaps Telstra.

He said that SMSF trustees were buying a handful of stocks regardless of value or where we were in the cycle. “We will see continuous over-valuation of these stocks due to the excess demand in the market,” he said.

Professional managers, on the other hand, also offered dividend yield strategies, which the SMSF trustees were seeking, but also looked at the stocks’ value. Over-valued stocks can react more to macro shocks, which occur in the market, Kim said.

Tyndall’s current view of Australian equities in general is that there are “pockets of value” but price rises will be subdued until earnings growth picks up.

Tyndall is also concerned about unemployment. Roger Bridges, head of fixed income and a member of parent Nikko Asset Management’s global asset allocation committee, said he was surprised unemployment had not risen much as yet.

“I think the real danger is next year. I think the other danger is the housing market, which is being driven by investors and therefore more sensitive to interest rate rises. Housing was also boosted by last year’s wealth effect of the rising share market.”

In the US and UK, big companies reacted to the shock of 2008 by slashing their workforces and improving productivity. They are therefore in a better position to grow from here. This did not happen to the same extent in Australia.

Back at the ASX, Elmer Funke Kupper gave an insight into the ASX product strategy for the future. He said mFund added to “our investor supermarket that we are developing”. In the past 12 months, the ASX had added trading in government bonds and volatility products. “In future we will also have corporate bonds and international equities,” he said.

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