If you are the trustee of a self-managed super fund (SMSF), you are required to manage the monies in accordance with your members’ instructions, whether this is you alone, or with your partner and family. With this responsibility comes an onus to say whether you are doing a decent job or not as an investment manager.
And even if you have outsourced the investment functions to an adviser, you are ultimately still responsible for the investment performance. So, how can you determine whether you are cutting it as an investment manager?
One way is to simply compare the fund’s performance to the fund’s investment objective(s). For example, if your objective is to deliver a return of inflation plus 3% over a 10-year period, then if your fund has been growing at 6% per annum over this period, then give yourself a tick.
The problem with this method is that your objective might be unrealistic. Given the level of risk you are prepared to take, it may be too tough. Conversely, you might have set the bar too low.
A more direct method is to compare your fund’s performance to that being achieved by the major industry and retail super funds. After all, if you closed your SMSF, this is where the monies would go. So, how has the industry performed?
Super fund returns in 2017/18
Industry research groups Chant West and Super Ratings have released their reviews of the performances of the major retail and industry super funds in 2018.
SuperRatings says that the medium return for the most popular “balanced” option, which it classifies as a fund with 60% to 76% invested in growth style assets, is 9.2% for the 12 months to 30 June 2018. For a fund in pension phase, where the tax rate is 0%, the median return rises to 10.1%.
Over three years, the return for a fund in accumulation is 7.4% per annum and for five years it is 8.9% per annum. For 10 years, which includes the impact of the GFC, the return drops to 6.5% per annum, while the 15-year return is higher at 7.7% per annum. (see Table 1 below).
Table 1 – Median Balanced Super Fund Return to 30/6/18
Super investment options are typically classified according to the percentage of growth style assets they target. Growth assets are assets where a major part of the return is expected to come from an appreciation in the price of the asset, and include shares, property, infrastructure, commodities and collectables. Income assets are cash, term deposits and interest rate securities such as bonds, mortgages and hybrid securities.
Growth assets will typically deliver higher investment returns, but with more volatility and a higher probability of a negative return. Income assets will typically deliver lower investment returns, but with lower volatility.
Table 2 shows the median returns from one year to 15 years (net of investment fees and tax) of different super investment options categorised according to the percentage of growth assets. (This data is from Chant West – its “growth” option at 61% to 80% growth style assets is roughly the same as SuperRatings “balanced” option of 60% to 76% growth style assets).
Table 2 – Median (Accumulation) Super Fund Returns to 30 June 18
Source: Chant West
Because funds in pension don’t pay any tax, their returns will typically be higher than funds in accumulation mode by approximately 15%. While they might have some extra costs, a higher investment return should be expected for the same risk category.
How can you compare, and over what timeframe?
The first step is to categorise your fund (eg. growth or conservative, super or pension). Whether you use a target asset allocation or the actual allocation at 30 June probably doesn’t matter that much, we are really just after an approximate benchmark.
Next, determine your fund’s performance for the financial year. This usually can’t be done until you have all the tax information and can lodge your annual SMSF return, and may require the help of your accountant or administrator. Most SMSF software packages can calculate investment returns, so don’t be put off if your accountant tries to give you the brush on this. And remember that to compare like with like, we are looking at returns after tax and investment/administration costs. So, if you are doing the calculation manually, don’t forget to add back the franking credit refunds and deduct the administration costs.
What time period? Let’s start with the one-year horizon, but clearly no one gets fired for marginal underperformance over such a short period. See if you can extract data for previous years, and compare the returns over three years, five years and potentially even longer.
What should you do if your performance falls short?
The first task is to understand why you have underperformed. Two potential scenarios are that your mix of growth assets is different to the target or normalized allocation, or secondly, that the individual assets you have selected have underperformed compared to the overall asset class.
Table 3 shows the performance of the major asset classes over the periods to 30 June 18 (source Chant West).
Table 3 – Asset Class Performance to 30 June 18
If, for example, your growth assets didn’t contain any international shares, or the exposure was hedged, then you may have underperformed over the last few years. If your exposure to income assets was primarily through cash and term deposits, your returns may have been a little underwhelming.
Just as the performance of asset classes varies considerably, so does the performance of securities or sectors that make up each asset class. While we all understand this with individual shares, the performance of different components of the Australian share market has been quite marked over the last few years. Table 4 shows the performance of different components and industry sectors. Returns include dividends, but not the impact of any franking credits.
Table 4 – Australian Sharemarket Sector Returns to 30 June 18
Source: S&P Dow Jones
Many SMSFs, for example, have major holdings in the top 20 companies such as the banks, major retailers, Telstra and miners. Over recent years, the top 20 stocks have underperformed compared to the overall market (11.3% versus 13.0% in the last year and 5.7% per annum compared to 9.0% per annum over the last three years). Midcap 50 stocks, which are those ranked 51st to 100th by market capitalization, have starred over the above time periods.
The performance of the largest index, financials, at just 1.6% in 17/18 is likely to be a major drag on many SMSF portfolios. Conversely, if your fund has been overweight some of the health care leaders such as CSL, Cochlear or Resmed, the return should be looking pretty healthy.
Understanding where your SMSF has underperformed or outperformed is of course just an input into whether you should make any changes or not. Critically, you need to consider the outlook for the different assets classes/components/sectors going forward. That said, if you are materially underweight or overweight, it may be time to adjust.
And if your performance is consistently falling short?
If you aren’t cutting it as an investment manager, then you should probably wind up your SMSF and transfer your super to an industry fund. Alternatively, engage an adviser to help you. And if you already have an adviser and they aren’t cutting it, fire the adviser.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.