For SMSF investors looking to maximise returns through investment opportunities, I believe the current opportunities involve:

Small companies

Currently, a record-large valuation gap exists between large and smaller global companies. As of 31 October 2024, the difference in the Price-to-Earnings (P/E) ratio between US large and small companies was approximately 9x, with large companies trading at 27x P/E and small companies at 18x. Additionally, small companies are valued at just 59% of their larger counterparts when using the Cyclically Adjusted Price-to-Earnings (CAPE) ratio, even for similar earnings.

Historically, when investing at such a valuation gap, small companies have outperformed large companies by more than 6% per annum over the next decade - this makes small companies an appealing opportunity for long-term investors.

Private equity

With public market valuations having surged, a potential arbitrage opportunity exists in private equity, where valuations have risen more modestly. SMSFs can access private equity managers that might not be available through retail superannuation investment menus, providing a unique opportunity to take advantage of less liquid, potentially undervalued assets.

Bitcoin

SMSFs are one of the few ways to purchase Bitcoin within superannuation. Although Bitcoin remains a volatile and speculative asset, the large flows from ETFs and central banks could provide upside for investors with a higher risk tolerance.

Why internally geared funds can outperform property investment for young SMSF members

For young or less risk averse members looking to take a long term view, I believe that internally geared funds provide a more advantageous risk-reward compared to traditional leverage through direct property investments. In my view, there are several compelling reasons why this approach stands out as a superior alternative to property investments.

Internal gearing

Internally-geared share funds’ advantage lies in their lower borrowing costs on a higher-returning asset class. Share markets have historically outperformed Australian residential property over the long term.

Currently, you can internally gear share investments at borrowing rates below 5%, compared to around 8% for property through a Limited Recourse Borrowing Arrangement (LRBA). This makes shares more cost-effective and a lucrative option for growth-oriented investors.

Negative gearing

Negative gearing property is inefficient in a low-tax environment such as Superannuation. Super funds in the accumulation phase face only a 15% tax rate, which limits the value of tax reductions like negative gearing.

Outside Super, negative gearing can deliver tax benefits of over 30%, depending on your marginal rate. Additionally, borrowing costs for property are typically lower outside Super, as they avoid the added constraints and costs of LRBAs. For optimal returns, consider leveraging property investments outside Super.

Fully franked dividends

Conversely, fully-franked dividends from Australian shares are likely to incur tax liabilities when invested outside of a Super account. For example, if your marginal tax rate is 32% (including the Medicare levy), a $700 fully-franked dividend received outside of super would leave you with $680 after tax. However, within super, the same $700 dividend effectively grows to $850. This is because the 30% franking credit exceeds the 15% tax rate applied within the super fund, resulting in a tax refund that boosts your return.

Tax opportunities

One of the most valuable opportunities for Super contributions is the ‘catch-up concessional contributions’ rule. This allows members with a Total Super Balance (TSB) below $500,000, as of the previous 30 June, to access unused concessional contribution caps from up to five prior financial years, in addition to the current year’s cap.

For example, a member earning $150,000 annually could typically make a tax-deductible contribution exceeding $60,000 under this rule. This strategy offers significant tax benefits: the $60,000 contribution would save $20,250 in personal income tax. While the super fund would incur $9,000 in contributions tax (15%), the member still enjoys a net tax benefit of $11,250.

This concession provides a powerful way to reduce personal tax while strengthening retirement savings, making it an ideal option for those looking to maximise both tax efficiency and long-term financial security.