Retirement savings at risk from focus on domestic equities: Goldman Sachs

The growing appetite for equities at the expense of fixed interest comes despite a lacklustre performance from the ASX in 2014. Photo: Jessica ShapiroThe country’s growing army of retail investors and SMSFs are putting their retirement savings at risk by chasing dividend yields at the expense of investing in other asset classes, according to research by Goldman Sachs Asset Management (GSAM).

An annual survey of 600 retail investors raises some fascinating questions about asset allocation, the psychology of retail investors, their knowledge of risk, and the country’s $1.8 trillion retirement savings.

It shows retail investors have low confidence in the outlook for the domestic economy for 2015, with only 13 per cent more confident than a year ago. Despite this, most expressed strong confidence in the outlook for Australian equities, with 77 per cent expecting annual returns from equities of more than 5 per cent over the next three years.

The growing appetite for equities at the expense of fixed interest, international equities and other asset classes comes despite a lacklustre performance from the ASX in 2014 that resulted in it ranking 44 out of 73 global exchanges. Australia has been a relatively poor equities market performer when ranked on the global stage for at least eight years.

It also follows the release of a thought-provoking report last year by Credit Suisse claiming SMSFs are “retarding investment, employment and growth in Australia”. It estimated that the SMSF sector, many of which are retail investors, which represents $531 billion of the country’s $1.7 trillion retirement savings, accounts for 16 per cent of the Australian stock exchange. This money, it argued, along with an obsession by investors for dividend yields, was affecting the decisions of corporate Australia in terms of share buybacks and dividend payments versus capital expenditure.

According to GSAM’s research, money will continue to pour into equities. The survey shows that more than a third of respondents intend to increase their exposure to Australian equities in the next 12 months.

Jessica Jones, who runs Third Party Distribution at GSAM in Asia Pacific ex Japan, said the research indicated that retail investors do not understand the importance of a diversified portfolio. She said 65-year-olds – who might be expected to have more diversified portfolios – have the highest bias to Australian equities, with 91 per cent invested in the asset class and 36 per cent intending to invest more of their retirement savings in equities in the next year. Only 17 per cent invested in fixed interest.

She said the research showed a clear disconnect between retail investors saying they have a low appetite for risk (42 per cent stated it was the most important criterion) and wanting to increase their exposure to Australian equities. The survey showed 86 per cent of retail investors have an exposure to Australian equities and only 13 per cent have direct fixed interest.

“Retail investors appear to be ignoring some important macro themes as they set investment intentions, and in our view the data points to an ongoing lack of meaningful diversification in investment portfolios,” she said.

The firm’s research found that two-thirds of respondents who had a financial adviser rated their financial adviser as the biggest influence on their investment decisions, compared with 65 per cent of investors who did not have a financial adviser who relied on their own experience, views and knowledge.

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