I guess when you talk about cash, there’s ‘cash’ and there’s ‘cash’. The problem here is the source of truth – the ATO stats – and they do a very substantial analysis. There’s a very long lag, so the ATO only knows once a year because funds don’t have to tell them until somebody does their tax return. The most recent stats that came out were the 2011/2012 statistical overview and SMSFs don’t generally have to lodge their tax returns until March the following year so the data’s not really useful. However, the most recent results did match the same trend [as] from our own data analysis. The information you see in this is very much from the tax returns, but they’re not really designed around investment information. All the categories get lumped into this one broad category so it doesn’t really tell you much – like what’s the cash component. If you look at the numbers from June 2012, they were running cash and term deposits at about 33 per cent. However, being June, you have to remember that there’s a contribution history with SMSFs where trustees dump an awful lot of cash in June. People make decisions about their contributions – particularly top-up contributions – at the end of the financial year, which generally goes in as cash. So what happens in July and August is that the cash comes out and gets invested.

The latest ATO figures reveal a jump in the level of SMSF investment in residential property. Is that a cause for concern?

Yes, there’s been a lot of SMSFs buying property but again, the ATO’s data said that it was 12 per cent for non-residential and 3.6 per cent for residential. Comparatively, when Multiport looked at our client base, we were looking at about 15.8 per cent in direct property at that point. What you need to remember is that the overall pool has gotten much bigger. The super pool in Australia is about $1.8 trillion and the SMSF share is about $550 billion and the size of the pool has grown considerably in terms of sheer size and also proportionally. If the amount of property held in SMSFs is still proportional, then we’ve now got $75 billion in property, so somewhere over the past 10 to 20 years we’ve had to buy some $65 billion in property. But having said that, I think you’ll find the property market is in the trillions.

There’s been growth in the number of limited recourse borrowing arrangements for SMSFs. Is that a concern?

The question becomes one of policy: why did the government decide that super funds were able to borrow to invest? But it’s also limited recourse. The argument here is that every other investment is some form of limited recourse borrowing. You buy [company x] shares, there’s gearing in [company x], but there’s no liability to the loan – your exposure to the loan is the value of my share. If [company x] totally screw it up I’ve lost my capital but I don’t have any other debt on it. Again, our records show there’s about a 50-50 split on what they’re gearing into. They’re not just gearing into properties, they’re not just gearing into equities, it’s the managed funds and things. And you have to remember that up until six years ago they couldn’t do property.

SMSFs are known for being underweight in international equities. Are there any indicators this will change?

I think that has increased, albeit marginally. I think that’s simply because what we’re seeing is people utilising other structures now. If you look at the international equity exposure you’re looking at about 10 per cent of funds. When investing with SMSFs there is obviously the control and the flexibility question, but the other thing is transparency and by that you need to ask, do I know what I’m buying? What I’m investing in? And the problem with international is that to know what you’re buying is often very difficult.

What are your thoughts on where patterns in SMSF asset allocation will head in the medium to long-term?

What you’re going to see is a dichotomy of the SMSF allocation, and one thing we have to recognise is the changing demographics of SMSF trustees and members – we’re getting a lot more younger people. Traditionally, trustees have been the older members – nearly 70 per cent are over the age of 50 – whereas in the other super funds it’s exactly the opposite – 70 per cent are under 50. You’ve got older members looking for a different sort of portfolio and then you have these younger ones who can’t really access their benefits. It’s going to sit there for 30 years; they’re not worried about getting their money out nor do they have the ability to get it out. But that older category, a lot of them are in pension funds and that means they become much more cash flow-sensitive. If the funds themselves are paying out cash then they need money to pay the pensions. It’s a different dynamic – one’s a growth dynamic and one’s about cash flow and, to an extent, maintenance and growth.

SMSF trustees are often criticised for not having diversified portfolios. Does that hold water and, if so, can you see it changing?

I don’t think they’re looking at their portfolios in isolation; they consider their SMSFs as part of all their investments. Someone might be heavily in an asset class in their SMSF because they have all these others assets in this other asset class outside the system. Trustees think overall they’re balanced, but if you look at the SMSF it doesn’t look that way. It’s often much harder to deal with an industry or retail fund unless the trustee gives you lots of investment options that you can tailor, but you can’t do that with a blanket balance fund.

What advice would you give trustees looking to ‘up their game’ in their portfolio construction?

You need to ask yourself, am I trying to grow the fund’s value or am I trying to generate income? Then go back to the standard principles: what level of risk am I willing to bear to get that outcome? Using that, you can then create a portfolio around that. Rather than say, ‘Gee, I like that asset it, I’ll buy it’, ask yourself does it actually fit what you’re trying to achieve. You have to set the goals first and then build the road around the goals, not the other way around.