Daniel Dusevic: Diversifying SMSF portfolio into fixed income assets could deliver more attractive yields

While rising share and property prices are great news for self-managed superannuation funds, investors should consider diversifying their portfolios into fixed income assets to spread their investment risks and reap more reliable income — an essential for the retirement years.

New data from the Australian Taxation Office reveals SMSFs have almost a $150 billion exposure to Australian property investments alone, with residential and non-residential property investments totalling a record $141.8b in the March 2024 quarter, up 6.2 per cent from $133.5b in the December quarter.

That represented 15 per cent of their total net assets, which sat at $932.9b as at March 31.

SMSFs also invested a near record of $145.1b in cash and deposits, another 15 per cent of their total assets, with that cash earning yields barely above inflation. Another $287.1b was invested in Australian and overseas shares, or around 31 per cent of total SMSF assets.

In contrast, SMSFs have invested just $9.5b directly in debt securities and $6.5b in loans, less than 2 per cent of total SMSF assets.

With such high allocations to Australian property, shares and cash, SMSFs would benefit from assessing greater allocations to fixed income investments, which can deliver more attractive yields than property and shares.

There are other factors which favour fixed income investments over shares or property, such as being more accessible in SMSF portfolios.

Unlike property, fixed income investments do not require a huge capital investment or deposit. Nor do debt investments attract a huge stamp duty slug.

You can invest much smaller amounts of money in debt funds unlike property, which has a big price barrier to entry. Apart from that, there are also other costs such as stamp duty and conveyancing on residential property purchases to consider, costs which raise the bar and reduce the return.

Reflecting Australians’ love affair with property, recent data from the Australian Bureau of Statistics revealed that household net wealth sat at a record $15.50 trillion in the December 2023 quarter, boosted by a record level of property assets of $10.50t as at the end of last December.

As a proportion of net household wealth, residential property assets accounted for around 64.5 per cent of household wealth, up from 61.7 per cent in December 2020.

For SMSFs, while their portfolios are more diverse than those of Australian households, the advantages of diversifying into fixed income assets, from which they can draw a regular income, are clear.

Ultimately, it is income-yielding assets that will support investors in everyday living and in retirement.

SMSF investment strategies could consider diversification into private credit, or non-bank loans to corporations, which offer yields close to 10 per cent per annum, much higher than yields on cash or property.

With inflation remaining sticky, this will favour yields on private credit, with interest rates on corporate loans typically floating rate, allowing investors to take advantage of interest rates in a higher-for-longer scenario.

Given its appeal, several larger industry superannuation funds such as AustralianSuper are investing in private credit. Australia’s largest superannuation fund is one of the largest investors and has allocated over $US4.5 billion ($6.75b) in private credit globally and stated in December 2023 its ambition to triple its exposure in the coming years.

“AustralianSuper is looking to increase its investments in private credit as it is an asset class which could have the potential to provide attractive income, returns and stability during uncertain economic times,” the super fund recently said.

Separately, the biggest investment allocations UniSuper has made into any asset class over the past 18 months has been in the debt markets, not in equity markets.

While the fund is holding back on allocating any more to investment-grade bonds, believing them to be expensive, UniSuper’s chief investment officer John Pearce recently told The Wall Street Journal that he was still taking bets on private credit.

Compared with equity markets, which are arguably fully valued, private credit provides investors with much lower volatility and more attractive returns.

SMSFs also enjoy capital protection through stringent loan process, along with the security taken over borrower assets. This is a significant advantage over shares, whose prices are far more variable — and vulnerable to correction.

Daniel Dusevic is a director of Capspace