With the ATO contacting SMSFs about their investment strategies there is increased interest in diversification, or lack of diversification, in SMSFs. But how diversified are SMSFs?
The ATO recently wrote to around 17,700 SMSFs with asset concentrations of 90% of higher, warning about the investment strategy requirements around diversification. These letters were potentially restricted to SMSFs invested in particular asset classes – such as property or cryptocurrency.
It has been noted that 17,700 is around 3% of the total number of SMSFs currently. However it does not appear to be the full number of SMSFs with more than 90% in a single asset class. As at 30 June 2017 – 2016/17 is the most recent year for which these ATO statistics are available – 29.9% of SMSFs had 90% or more invested in a single asset class. At that time there were 579,775 SMSFs, and so there would have been over 173,000 SMSFs with 90%+ in one asset class.
These statistics are by the concentration of assets – so they include, for example, SMSFs with 100% invested in cash along with funds 100% invested in property.
Decline in less diversified SMSFs
There has, generally, been a small decrease in the proportion of SMSFs with high concentrations in single classes of assets between 2012/13 and 2016/17. For instance, in 2012/13 32.30% of SMSFs had 90%+ asset concentration, and this had declined to 29.90% by 2016/17.
The proportion of SMSFs with lower diversification – higher levels of concentration in assets – tends to decline as the asset balance of the fund increases (though there is a slight increase in concentration for SMSFs with balances over $10 million). For instance 45.50% of SMSFs with a balance between $100,000 and $200,000 have a 90%+ concentration in a single asset class, compared to 28.10% of SMSFs with balances between $500,000 and $1 million.
The statistics also show that SMSFs in accumulation phase are less diversified than funds in pension phase.
What assets are SMSFs concentrated in?
So what are SMSFs with low diversification invested in? Largely it is cash, shares and property.
24% of SMSFs have 50% or more invested in cash and term deposits, and 12.7% have more than 90%+ invested in these assets, and 8.70% of SMSFs are 100% in cash.
Listed shares are the second most common assets SMSFs are concentrated in, with 25% of funds holding 50% or more in shares, and 5.60% of funds having 90%+, though only 0.20% are 100% in shares.
Next come Limited Recourse Borrowing Arrangements (LRBAs) and real property – both residential and non-residential.
7.80% of SMSFs have 50%+invested in LRBAs. 6.80% of funds have a similar amount invested in non-residential property, and 4.90% in residential property.
3.60% of SMSFs are 90%+ invested in LRBAs, 1.90% in non-residential property and 1.50% residential property.
Only 0.20% of SMSFs are 100% invested in LRBAs or non-residential property, and 0.10% in residential property.