How well has your SMSF done?

Co-founder of the Switzer Report
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Super funds have enjoyed their best returns in 16 years, according to Chant West, one of the leading super research companies. The median return for a ‘growth’ fund for the year to 30 June 2013 was 15.6%, with the top performing fund earning 18.6% and the worst performing fund still a healthy 10.2%.

These are, of course, figures for the leading industry and retail super funds. However, while there are other tangible advantages to running your own SMSF such as estate planning and strategy implementation, at the end of the day, it is ultimately about how much money you will have to enjoy in retirement. If you can do a lot better in a retail or industry fund, why would you continue to maintain an SMSF?

While this question may seem a little provocative, reconfirming periodically that your SMSF is the right superannuation vehicle is a sensible approach. Clearly, performance comparisons are going to feature pretty strongly as considerations.

The market

Funds are categorised according to their asset allocation – the split between ‘growth’ assets and ‘income’ assets. Growth assets, such as shares, property, collectables and commodities, deliver most of their return through an appreciation in the price of the asset, whereas ‘income’ assets such as cash and bonds generate their return through the payment of interest. Because their returns are more variable, growth assets are generally considered to be higher risk.

As the table below shows, the median “growth” fund (those with between 61% and 80% of their assets in growth assets) earned 15.6% in the year to June, the median “balanced” fund (41% to 60% of assets in growth assets) earned 11.6%.

If your fund is in pension mode and paying no tax, you can roughly multiply the returns in the table above by (100/85) or 1.17 to calculate the equivalent return.

Volatility of returns

Interestingly, Chant West says that since the start of compulsory super in 1992, there have only been three years (out of 21) when the median return on a growth fund has been negative. The best financial year was 96/97 (19.4%), the worst 2008/9 (-12.9%).Where did the performance come from?

Fund managers review the performance of the individual asset classes to see what drove the performance of the fund. In 2012/13, the performance of growth funds came primarily from Australian and international shares.
In fact, other research suggests that the biggest contributor to performance for the leading industry growth funds in 2012/13 was international shares. This is a very different position to the average SMSF, which, according to ATO data, only has a tiny allocation to international shares. While there are some problems with this data, there aren’t many SMSFs that have the approximate 20% allocation to international shares that industry and retail growth funds typically enjoy.

And the share market sectors?

During 2012/13, the different share market sectors recorded very different performances. Financials, telecommunications and health care starred – materials and energy were the duds.

The cautionary tale

The last financial year has been a great year for super, and most SMSF members are going to be pretty happy when they receive their annual member statement.

While it is easy to sit back and think things are going well, it is a good idea to compare your SMSF’s performance with the industry benchmark (based on the risk profile and weighting towards growth assets) to see what sort of job you are really doing. Or, if you are being advised, to help validate the value your adviser may be adding.

Finally, work out what is driving the return. Many SMSFs have material holdings in the four major banks and Telstra – and should be enjoying a percentage fund return in the 20s – possibly even 30s for 2012/13. The cautionary tale here, however, is that it is very rare for an asset class to be the best performing asset class two years in a row. Not unheard of, but unlikely.

So, those SMSFs that fit the “overweight banks and Telstra” category might have to work a little harder in 2013/14 to enjoy similar returns. [Read what Barrie Dunstan had to say about that last week here.]

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 regards to your circumstances.

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