Self-managed superannuation funds control a quarter of Australia’s $3.3 trillion-dollar retirement savings system. New data from the tax office for the 2019-2020 financial year shows how SMSF trustees are investing, how they performed and whether they paid more fees than an average industry super fund member. Here’s six things we learned:

Domestic shares dominate as cryptocurrency grows from tiny base

Trustees favoured domestic investments over international shares in FY20.

A little over a quarter of all assets were locally listed shares, followed by cash (20.7%), unlisted trusts (11.9%) and non-residential property (9.5%).

By contrast, directly owned overseas shares were 1.3% of all assets. Foreign equity exposure is likely to be higher because investors also own international shares through listed trusts (6%) and other managed investments (5.6%), categories which include managed funds and other investment vehicles.

Cryptocurrency holdings edged up in FY20 as investors turned to SMSFs to bet on the speculative assets.

Total crypto assets rose 54% to $218 million. The number of SMSFs with exposure rose faster, doubling to 0.6% in FY20 versus a year before. Holdings remain modest and the average fund with cryptocurrency in it has $67,000 worth.

Older investors and older funds continue to dominate

The number of people setting up new SMSFs rose in FY20, although new starts remain below 2015 levels.

A total of 21,000 new funds were established in FY20, up from the trough of 20,000 the year before but down from a peak of 33,000 in FY15. New data released last week shows establishments grew again in FY21 to 25,000.

The sector remains the domain of older investors. Investors under 35 established 13.5% of all new funds in FY20, a figure that has held steady the last five years.

The average age of SMSF trustees rose in FY20, hitting 60.6 compared to 60 the year before.

Cash rules

Australian self-managed superannuation fund (SMSF) investors continued their love affair with cash and term deposits in the financial year that featured the covid pandemic.

A fifth of the $742 billion in SMSF assets were held in cash or term deposits for the financial year ending 30 June 2020. For the 96% of SMSFs that contained the asset class, the average holding was $276,000.

The allocation to safe assets did not appear to be a pandemic related move, with cash holdings as a share of total SMSF assets at 20.7% compared to 21.1% in fiscal 2019 and 21.6% in fiscal 2018.

A minority of SMSFs are hoarding large quantities of cash. A fifth of funds held more than half of their assets in cash and 6% were fully invested in the asset class.

Older and larger SMSFs dodged pandemic downturn

Larger holdings of cash may help explain how more than 85% of SMSFs outperformed the S&P/ASX 200 in fiscal 2020.

Australia’s benchmark index fell 11% over FY20. By comparison, 40% of funds posted positive gains and only 15% of SMSFs suffered a comparable decline of more than 10%.
Outperformance was concentrated among older funds with larger balances.

SMSFs with balances between $100,000 and $200,000 fell 6% compared to the 1.3% gain posted by those with assets between $5 million and $10 million. Newly established funds tended to perform worse than older ones. SMSFs less than two years old averaged a negative return whole those older than two years posted positive gains.

Many SMSFs are unviable and underperforming

The Productivity Commission and the SMSF Association are at odds about the quantity of assets an SMSF needs to be financially viable relative to industry funds. The industry peak body says $200,000, the ATO is more conservative at $500,000.

By either standard, a large chunk of SMSFs are unviable.

Just over a third of funds had $200,000 or less in assets. Two-thirds of funds would fail the Commission’s higher bar of $500,000.

The number of smaller funds is declining steadily. In FY20, 39.6% of funds had $200,000 or less in assets, compared to 44.3% four years earlier.

Performance also raised red flags. In the five years since FY2016, between a quarter and half of funds returned zero or less. AustralianSuper Balanced returned an average of 8.8% between calendar years 2015 and 2020.

A third of all SMSFs had a total expense ratio over 2% in FY20 at a time when industry funds are being forced to shutter or consolidate due to high fees and underperformance. The ratio measures a fund’s running costs against total assets and includes management and administration expenses, interest charges, insurance and SMSF auditor fees.

By comparison, industry giant AustralianSuper charges a 0.63% investment fee on account balances. Administration fees are $2.25 per week and up to 0.04% of the balance.