As SMSF trustees, one of our jobs is to manage the monies in accordance with our members’ instructions, whether this is you alone, or with your partner and family. With this responsibility comes an onus to say whether we are doing a decent job or not as an investment manager.
And even if you have decided to outsource 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. If, for example, 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% pa 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 comparison is to the returns the professionals are getting for their members in industry or 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 2015/16
Chant West has released its review of the performance of the major retail and industry super funds in 2016. It finds, for example, that the median return for a “growth” super fund for the 12 months to 30 June is 3.0%. Going back over 3 years, the median return is 8.6% pa, and if you stretch it back to 15 years, the median “growth” fund has returned 6.2% pa.
It classifies super funds according to the percentage of growth assets they target. Growth assets are any assets where part of the return is expected to come from an appreciation in the price of the asset, and includes shares, property, infrastructure, commodities and collectables. Income assets are cash, term deposits and interest rate securities such as bonds, mortgages and hybrid securities. Table 1 shows the median returns from 1 year to 15 years (net of investment fees and tax).
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. Table 2 shows the adjusted median returns for a fund in pension mode.
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 3 years, 5 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 16 (source Chant West).
If, for example, your growth assets didn’t contain any listed property trusts, then you may have underperformed during the last 12 months and 3 years. If your portfolio just had Australian shares and you haven’t held any international shares, then you are likely to have underperformed over the 3 year and 5 year time horizons.
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.
Many SMSFs, for example, have major holdings in the top 20 companies such as the banks, major retailers and miners. In the 12 months to 30 June, the top 20 stocks underwhelmed with a return (including dividends) of -7.0%, compared to a return for the midcap 50 (stocks ranked 51st to 100th by market capitalisation) of 17.7%.
Understanding where our SMSF has underperformed is of course just an input into whether we should make any changes or not. Critically, we need to consider the outlook for the different assets classes/components/sectors going forward.
That said, if we are materially underweight or overweight, it may be time to adjust.
And if our performance is consistently falling short?
If you aren’t cutting it as an investment manager, then you probably should wind up your SMSF and transfer your super to an industry or retail 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 regards to your circumstances.
