What is it about?
The portfolios chosen by self-managed investors reflect their preferences for risk (among other things). SMSFs are characterized by relatively large allocations to 'cash'. This reflects quite a high level of risk aversion. Within economic theory, it can be shown that the maximization of the growth rate of wealth share is a criterion consistent with 'survivability' or 'fitness'. In turn, this is consistent with maximizing a logarithmic utility function. Such a utility function is consistent with a particular degree of risk aversion. The degree of risk aversion consistent with the portfolio structure of the typical SMSF is too high to be consistent with logarithmic utility maximization and survivability. Despite their current prominence, if this level of risk aversion continues to characterize SMSFs, the proportion of the total invested superannuation savings invested in SMSFs must be expected to decline.
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Why is it important?
Self-managed superannuation represents a very significant part of Australia's retirement savings. If the funds managed there are managed so conservatively as to be consistent with a level of risk aversion that is far in excess of what is necessary to maximize the growth in wealth share, the proportion of Australia's retirement savings invested in SMSFs will decline (though not necessarily the total dollar amount).
Perspectives
This was intended to be the capstone on my series of SMSF papers, which began in 2007 with "The Diversification and Performance of SMSFs". I have since decided to write a book on the subject. I am presently working on this. The survivability paper is important, I think, because many people just expect SMSFs to 'take over' the superannuation sector. Although the statistics fluctuate with market conditions, there have already been years since the article was published during which the share of total savings invested in SMSFs has declined in favor of professionally managed funds. SMSFs will hold their own during market downswings because of their conservative nature. During market recoveries and during normal market conditions, a gradual decline in the percentage of total superannuation savings invested in SMSFs would not be surprising.
Dr Peter J Phillips
University of Southern Queensland
Read the Original
This page is a summary of: Will Self-Managed Superannuation Fund Investors Survive?, Australian Economic Review, February 2011, Wiley,
DOI: 10.1111/j.1467-8462.2010.00618.x.
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