Australia is becoming a nation of selfies. We’re not talking about the narcissistic photography popular among tweens and an ever-growing number of people who should know better.
Selfies, or self-managed superannuation funds, however you like to refer to them, are on the rise among Australians with the do-it-yourself super sector experiencing strong growth.
Four-and-a-half years ago, about 790,000 Aussies had a selfie. Today, more than 1 million Australians have taken superannuation into their own hands. This movement has had a significant effect on the superannuation sector in Australia.
Since the global financial crisis, the total value of assets held by SMSFs has increased by 68 per cent to $568 billion, accounting for one-third of all superannuation assets. Selfies are largely directing this capital into the equities market, driven by low cash rates and high-yielding stocks such as Telstra Corp and Commonwealth Bank of Australia.
Credit Suisse estimates SMSFs own 16 per cent of the market capitalisation of the ASX. The presence of SMSFs in the market is expected to grow, with Deloitte forecasting $2.23 trillion in assets by 2033.
Australian listed investment companies (LICs) are something of a darling sector in the eyes of selfies. For example, more than half of advisers surveyed at a recent Perpetual Equity Investment Company roadshow cited the growth of the SMSF market as one of the main reasons for the resurgence of LICs.
In another example, we estimate that about 60 per cent of our flagship fund WAM Capital’s 14,500 shareholders are selfies. A number of factors are driving their union, in particular regulatory changes, increased awareness of the LIC sector and its benefits, and recent growth in LICs in the Australian market.
The Future of Financial Advice reforms have led SMSFs towards LICs, particularly through the guidance of planners and advisers. The reforms, which came into effect on July 1, 2013, require financial planners to provide advice “in the best interests of the client” and prevent them from receiving commissions offered by other managed funds.
These reforms have removed an important disadvantage LICs faced relative to other financial products, such as mutual funds. Importantly, LICs can pass on to investors franking from its investee companies from any tax paid.
This means that over time a LIC investor’s after-tax return can be significantly enhanced by the use of franking credits, depending on where those shares are held and the investor’s applicable tax rate. In today’s yield-driven bull market, this is highly attractive to selfies.
The market has started to meet the increased demand for listed investment companies, with a number of new LICs listing on the ASX in 2014 and more planned for this year. Investors are now spoilt for choice, with more than 70 LICs operating under different investment mandates.
In a recent report, Credit Suisse estimates SMSFs will continue to convert cash into equities to offset the potential income deficit caused by lower interest rates. If the Reserve Bank of Australia cuts rates by a further 50 basis points, Credit Suisse predict SMSFs would need to move about $28 billion from cash into equities to protect current income streams.
With yield a key focus for selfies, we expect an increasing portion of this capital will be allocated to listed investment companies in addition to the broader market.