My self-managed superannuation fund investments — Part 1

Many of my friends and colleagues enjoy investing directly in shares and assume that I still do. This is incorrect; I have no direct share investments. I no longer want the risk, worry, and administrative hassle associated with directing investing in a listed company.

Often, I am tempted to invest in individual stocks but rarely do; ultimately, the risk significantly outweighs the potential rewards.

However, I always ensure that, before making any investment, I fully understand the risks and potential return associated with that particular investment. In addition, constant monitoring of my investments is essential.

In this two-part series, I will outline the investments I have selected for my own SMSF portfolio.

Setting the Boundaries

I work in the Morningstar Manager Research team as a senior analyst and have worked in the finance and investment sector for many years.

My investments have historically been a mix of cash, direct shares, and managed funds through a self- managed superannuation fund. However, in the past decade, my SMSF has slowly moved exclusively to investments in managed funds, mainly exchange-traded funds.

My SMSF is set for the long term and adopts a balanced approach aiming at low risk and solid return. The investment strategy is built around seeking to balance equities and bonds, domestic and foreign exposure, and a blended investment approach (incorporating elements of both value and growth investing).

The passive versus active debate is ongoing, but in my view, it is highly dependent on the market associated with the specific asset class. Typically, I invest most of my money allocated for a particular asset class into an active fund and the remainder into a passive fund. In addition, I don’t worry too much about modest departures in weightings from broad benchmarks.

Yes, the majority of my SMSF’s investments are in Morningstar Medallist funds. I am a long-term investor, so I rarely change investments but will normally move if the Morningstar Analyst Rating is significantly downgraded (to a Neutral or Negative rating). Generally, though, I’ll let my investments ride the economic cycle.

I am not an expert in every asset class and spend considerable time reading the research reports and thought leadership articles written by my colleagues in the Manager Research team, particularly regarding bonds, real assets, global equity funds, asset allocation, and portfolio construction.

About seven to 10 years ago, I felt it was the right time to reset the structure of my SMSF portfolio.

In this first article, I will outline the funds I selected in two of the most difficult asset classes—bonds and international equities.

In the second article, I will move on to the slightly more straightforward asset classes (for me at least!) of domestic equities and real assets and the challenges I still faced in selecting funds in these sectors.

My SMSF portfolio

After much searching and deliberation, the managed funds that I settled on for my SMSF were:

Bonds

Bonds are a difficult asset class, and my requirements included low-cost exposure to both the domestic and international bond market and a consistent track record.

BetaShares Western Asset Australian Bond Fund ETF (BNDS)

• Morningstar Analyst Rating: Silver
• Morningstar Category: Bonds—Australia
  
  

BetaShares Western Asset Australian Bond ETF is a compelling choice for domestic fixed-interest exposure owing to its best-in-class team and straightforward approach.

This vehicle represents a strategy that Morningstar holds in high regard—Western Asset Australian Bond—in an easily accessible listed form.

Anthony Kirkham, head of investment/portfolio manager, is the leader of this strategy, and we have high regard for his investment knowledge and skills. Kirkham is supported by an experienced investment team.

There’s appeal to the strategy’s simplistic and relatively conservative investment process, which seeks mispriced domestic fixed-interest securities within various sectors.

Sector and issuer limits are applied to help damp volatility in different environments. Still, sector allocation and issuer selection have been strong over the past decade, emphasising the team’s rigorous analysis in these areas.

The plus or minus 1.0-year duration range keeps the portfolio’s active duration reasonably close to the index. The track record has been consistent and solid over multiple time frames, and the annual management fee is competitive relative to peers.

Vanguard Australian Fixed Interest Index ETF (VAF)

When looking for international equity strategies for my SMSF, my main requirements were that the funds were to be ‘long only’ (as few can consistently short stocks successfully over the long term) and well-diversified (across geographies and company size).

Platinum Global (Long) Fund (15362)

• Morningstar Analyst Rating: Neutral
• Morningstar Category: Equity World Large Blend
  
  

Despite recent strong performance, this is probably my most disappointing investment.

The Platinum Global (Long) Fund is a sound offering, but Morningstar’s conviction in the strategy has been reduced because of missteps in portfolio positioning in recent years, including not adjusting sufficiently for the global low interest-rate environment and an overweighting to stocks exposed to the Chinese economy.

The well-respected Clay Smolinski was appointed as portfolio manager on the strategy in 2014. The repeatable value-oriented investment process is straightforward and methodically applied but, being a long-only fund, unlike the Platinum International fund, the strategy is not permitted to short-sell.

The Platinum analyst team uses bottom-up analysis to search for undervalued companies that are out of favour with the financial markets or where the competitive environment, technological landscape, or government regulation is meaningfully changing.

The resulting 40-70 stock portfolio is long-term, high- conviction, and benchmark-agnostic.

iShares S&P 500 ETF (IVV)

• Morningstar Analyst Rating: Silver
• Morningstar Category: Equity North America
  
  

Given the breadth of market coverage and the cost efficiency, iShares S&P 500 ETF is a fine choice for investors seeking US-specific equity exposure.

The strategy is expected to outperform its peers over the long term and remains the clear choice for investors to gain US exposure. It can be paired with other ex- US products to form a balanced global equity portfolio.

The underlying benchmark, the S&P 500, is a market-cap-weighted index of the largest 500 companies in the United States. Thus, it offers giant- to mid-cap exposure, covering about 80% of the free-float-adjusted market cap of the US equity market. This results in a well-diversified index at the stock and sector levels.

Vanguard FTSE Europe Shares ETF (VEQ)

• Morningstar Analyst Rating: Not covered by Morningstar
• Morningstar Category: Equity Europe
  
  

The Vanguard FTSE Europe Shares ETF tracks the FTSE Developed Europe All Cap Index. The top-five country exposures are the United Kingdom, France, Switzerland, Germany, and the Netherlands.

The top three stock holdings are food company Nestle SA, semiconductor company ASML Holdings NV, and pharmaceutical company Roche Holding AG.

VEQ provides low-cost exposure to companies listed in major European markets, but there is no currency hedging.

I've included it for many of the same reasons as iShares S&P 500 ETF, but it provides European exposure rather than US.

Vanguard MSCI International Small Companies ETF (VISM)

• Morningstar Analyst Rating: Gold
• Morningstar Category: Equity World Mid/Small
  
  

Vanguard MSCI International Small Companies Index ETF offers Australian investors incredibly cheap and highly efficient access to the global small-cap markets.

The global small-cap market is a broad and heterogeneous opportunity set. It is fraught with many incoherent idiosyncratic risks fostering inefficiencies, which has empirically led to a wide return dispersion.

Conventionally, these attributes would make any market segment attractive for an active approach to generate significant alpha. In reality, the evidence points to the contrary. The risk/reward fragmentation in the global small-cap landscape has been a demanding segment for active strategies.

The underlying MSCI World ex Australia Small Cap Index benchmark represents almost the full opportunity set available for active managers.

Vanguard MSCI International Small Companies Index ETF offers unbeatable value in a difficult- to-navigate market segment with a compellingly low management fee.