Navigating 2025: The case for defensive assets in SMSF portfolios

Self-managed superannuation funds (SMSFs) in Australia are allocating a significant proportion of their assets towards Australian shares, property, and cash and largely ignoring offshore shares and fixed income investments.

This imbalance exposes these retirement funds to heightened vulnerability in the event of a downturn in either the Australian equities or property markets.

The total value of superannuation assets grew in the third quarter of 2024, reaching $4.1 trillion by the end of September. Of this, assets in APRA-regulated super funds increased by 15.1%, bringing them to $2.83 trillion. Meanwhile, the value of assets in SMSFs grew by 10.9%, reaching a record high of $1.02 trillion.

A clear picture SMSFs’ asset allocation

According to the Australian Taxation Office, SMSFs invested total assets in the September quarter:

· $286.3 billion in Australian shares, or around 28%,

· $161.7 billion in cash and term deposits, or around 16%,

· $165.2 billion in direct property, or 16%.

However, fixed-income investments accounted for just $11.8 billion of SMSF assets with another $6.9 billion invested in loans - just 1.8% of SMSF total assets. This is a small amount given that SMSFs have over one trillion dollars in assets under management.

Performance boost in new asset classes

Research from the University of Adelaide’s International Centre for Financial Services, commissioned by the SMSF Association, shows that self-managed super funds (SMSFs) have, on average, outperformed APRA-regulated super funds by 1.2 percentage points over the past five years, up to June 30, 2023. This shows that SMSFs tend to offer more consistent returns over time.

Between July 1, 2018, and June 30, 2023, SMSFs had an average return of 6.5% per year, compared to 5.3% for APRA-regulated funds.

The data shows that the median rate of return for SMSFs in the year ended June 30, 2023, was 6.8% compared with 8.4% for retail and industry funds regulated by the APRA, which is most likely due to SMSFs smaller allocation to international markets.

Neglecting defensive assets could be risky in 2025

SMSFs could create more resilient portfolios by increasing their allocation more to defensive asset classes. The ATO figures also highlight a stark neglect of fixed income, especially considering the substantial assets under management.

The current investment landscape warrants a more balanced approach to asset allocation. Fixed income assets such as private credit investments exhibit lower volatility compared to shares.

In the prevailing economic climate, characterised by uncertainty with the new Trump government and ongoing conflict in Eastern Europe and the Middle East, the stability offered by fixed income could be crucial over the remainder of 2025. The negative or low correlation that fixed income typically has with shares can act as a buffer during periods of market turbulence.

For income seeking investors who are willing to take on more risk than that involved with cash or term deposits, private credit investments can deliver investors yields of 9%-10% per annum, which is around two to three times more than the average returns on cash savings accounts and on residential properties, which typically fall below 5%.

Private credit funds typically pay a premium to returns on Australian investment grade corporate bonds, as measured by the S&P Australia Investment Grade Corporate Bond Index, which returned 6.6% over the year to 25 February 2025. That yield has been falling progressively over the past year and could fall further with February’s official interest rate cut.

The cash drag

The central bank’s recent decision to lower interest rates will also impact SMSF cash savings, with returns after inflation likely to drop towards zero or below. With interest rates on online savings accounts typically yielding less than 2% and likely to fall further, that exposes many savers to real returns less than zero. Compared to official inflation of 2.5% in January, returns on bank online savings accounts are substantially lower, and averaged just 1.75% in January 2025, down from over 2% a year ago.

For these reasons, SMSFs should consider diversification into private credit, which offers a relatively attractive income streams and capital protection through stringent loan assessment and loan management processes, often combined with mortgages over real property as security. This is important because ultimately, it is income-yielding assets that will support investors in everyday living and in retirement.