Basel III, TD’s, and reincarnation as an SMSF
In 1993, one of President Clinton’s advisers famously said that he wanted to be reincarnated as the bond market, because then “you can intimidate everybody”.
As for me, I want to come back as a self-managed super fund (SMSF). You can do pretty much whatever you like, your parents relax the rules when you throw a tantrum, and everyone wants to be your friend.
Take the investment strategy rules for example.
Every super fund, including SMSFs, is supposed to have a proper investment strategy. In practice pretty much anything goes. There are SMSFs which are 100% cash. There are now SMSFs which are 100% geared real estate. I read of a financial planner (who should know better) who invested 50% of his SMSF into a single private equity interest.
And while collective funds with properly diversified investments deal with increasingly onerous regulation and constraints, SMSFs get kid glove treatment ranging from collectibles to gearing rules.
Even new banking regulation works in favour of SMSFs.
Basel III (pronounced “Barl 3”) is the new set of rules for banks’ capital requirements. One of the key changes is that wholesale funding from institutions has limited value to banks. Collective super funds and managed investment schemes are, of course, institutions, so deposits from these sources generally cannot be used to meet a bank’s new liquidity requirements. The rationale is that the money isn’t sticky – institutions may pull deposits if there is a shock to the bank, or the overall system.
Deposits from retail investors are stickier and Basel III awards them a much higher value. Even when funding conditions improve, banks will chase retail deposits, and offer higher rates to retail investors. And the kicker – APRA has decided that SMSFs are mostly retail in nature, so SMSF deposits will have almost as much value to banks as those from direct retail clients.
SMSFs can therefore expect to receive materially better interest rates on deposits than collective super funds or fund managers.
How much difference will this make to the prospects of different products?
We are already seeing a “regulatory premium” being applied to retail rates of ~70 bps, which might extend towards 100 bps as we move closer to implementation of Basel III.
Banks need a direct line of sight to individuals to get comfort that money is sticky, so retail term deposits and products such as Macquarie’s CMA, which is a bank account (and heavily used by SMSFs), will continue to do well under Basel III.
How can collectives respond? Well, as falling rates remind us, deposits are a highly volatile source of income. Meanwhile, other sources of income such as dividends and rents continue to rise steadily. There continues to be a strong story in harvesting diversified income streams in poor markets that we could be telling a lot more, and a lot better.