It could be time for self-managed super fund (SMSF) trustees and their financial advisers to rethink heavy allocations to cash as interest rates slip, especially given strong returns seen in the fixed interest sector, according to global bond manager PIMCO.
PIMCO pointed to 2008/9 Australian Taxation Office data showing SMSFs had almost 30 per cent of funds on average allocated to cash, and said the indications are that these holdings have risen further in choppy markets.
While the move to cash had been a sound strategy while markets were falling, PIMCO said that data from UBS and Barclays showed that in the past year the Australian Bond Index returned 11.3 per cent and the Global Bond Index 10.5 per cent.
With "consensus predictions" of further rate cuts, now is a good time for SMSFs to diversify into other defensive assets which have low risk but greater upside potential, PIMCO said.
PIMCO also pointed to other disadvantages of the SMSF "default fall back option" of term deposits, including low liquidity and no guarantee of maintained returns after the end of the fixed term.
PIMCO head of global wealth management Peter Dorrian said although cash had served well for three of four years, the investing environment has changed and prospective returns from cash holdings are likely to fall.
"In a volatile investment climate, fixed interest funds offer SMSF investors reduced volatility, capital preservation and regular income distribution with potential for capital growth. The last decade bears the latter claim out as fixed interest also outshone shares in investment performance terms," he said.
"An actively managed bond fund also offers investors access to a fund manager who can quickly take advantage of market opportunities as they arise," he said.
PIMCO had recently seen monthly inflows into its fixed interest funds 10 times larger than pre-global financial crisis levels, he added.
