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Forward Thinking Magazine : August 2011
49 Over the period from December 2007 to March 2011, the allocation to international shares fell from 13.7 per cent to 8.8 per cent, property 22.2 per cent to 16.1 per cent and other investments from 4.8 per cent to 1.3 per cent. Of course some of the change in allocation can be attributed to performance and also the fact that property is not revalued on a regular basis. This can skew a portfolio weighting without any actual conscious decision to switch exposures. Another major trend in asset allocation emerging is that people have started to question the idea that equities will always outperform other asset classes. In the past, the maxim has always been that over a 10-year period equities will outperform all other asset classes. Farrelly says that is the biggest difference in asset allocation between now and five years ago. "Recognising that equities don't always perform in the long term is one of the big changes over the past few years and the GFC and the tech boom have proven it," says Farrelly. "You now need to assess where markets are and become more dynamic in your asset allocation. You need lower exposure to equities than was previously thought, as equities cannot be guaranteed to outperform." However, not everybody agrees and certainly the Multiport figures would say otherwise. Wright still believes that, over the long term, equities will outperform. "If they don't then it wouldn't be worth taking the risk. You will continue to see adjustments of asset classes before the relative return gets to a level where you are encouraged to take the risk again." International shares have lost some ground on the asset allocation front during the past few years but Cavendish's Hamilton believes this trend is about to reverse. "We're noticing that international markets are beginning to open up to investors," says Hamilton. "The number of clients buying directly into the US is growing because of the strength of the Australian dollar and the uncertainty in the Australian market. A number of brokers are now offering the functionality to buy international shares directly." This is already being borne out in the Multiport figures which showed that while the international shares allocation of 8.8 per cent was substantially below the 13.7 per cent of 2007, it was significantly higher than the 7.1 per cent in the December 2010 quarter. While cash is the current portfolio darling, fixed interest has flatlined in recent times, no doubt reflecting the rates you can get from holding your funds in at-call facilities such as cash management accounts and online bank accounts. As Farrelly observes, the fixed interest market has completely changed. "In the past, term deposit rates were one or two per cent less than those on government bonds so it made sense to be in government bonds," he says. "Since 2008, term deposits have been one to two per cent higher than the equivalent government bond so it makes no sense investing in bonds." Equally you need a compelling reason to invest in corporate bond issues. According to the Multiport figures, property fell from 22.2 per cent of asset allocation in 2007 to 16.1 per cent in the latest March quarter despite the introduction of limited recourse borrowing arrangements [gearing] within SMSFs in 2007. It is estimated that 13 per cent of funds in the Multiport survey currently use a borrowing arrangement and of those 56 per cent gear into property with the balance into financial assets. The general view is that interest in gearing [for property and/or shares] is quite high, but the follow-through rate is low. However, given that property prices have fallen, there could be some argument that the amount of money actually going into property within SMSFs has in fact risen. Capital protected products feature in some SMSFs, although Wright believes they have lost some of their appeal in the wake of the GFC. While they will deliver the protection promised on maturity, the poor sharemarket performances have meant that they have not delivered an annual return. Some SMSFs invest in art and collectibles, but it is still very low on the asset allocation radar. Last year's Cooper report, said 0.1 per cent of money invested in SMSFs was allocated to collectibles. The report mooted that collectibles should not be held in an SMSF and this threat has kept a lid on interest. Looking forward, asset allocation in SMSFs is expected to continue its focus on cash although the percentage may well have now peaked. The next big thing could well be direct investment in international shares. At the end of the day, the allocation reflects the risk profile of SMSF trustees.