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 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). 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 taking, 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 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 2021/22
With all major asset classes delivering negative returns, most super funds went backwards in 21/22. According to industry research group Chant West, the median ‘growth’ fund delivered a return of -3.3%.

This was the fifth time in the last 30 years that super funds have delivered a negative return, a ratio of 1 year in 6, better than the expected 1 in every 5 years.
Super investment options are typically classified according to the percentage of growth style assets they target. Growth assets are those where a major part of the return is expected to come from an appreciation in the price of the asset, and includes shares, international shares, property, private equity, 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 1 shows the median returns from 1 year to 15 years (net of investment fees and tax) of different super investment options categorised according to the percentage of growth assets. As you would expect, returns for ‘balanced’ and ‘conservative’ options are lower than the returns for ‘growth’ and ‘high growth’ style options.

Table 1 – Median (Accumulation) Super Fund Returns to 30 June 22

The median returns in 21/22 are interesting for a couple of reasons. Firstly, because all investment options delivered a negative return, including the defensive ‘conservative’ option, which mainly invests in government bonds. Secondly, the returns are potentially higher than ordinarily you might expect.

Whereas listed assets (shares, property and bonds) were hammered in 21/22, unlisted asset valuations didn’t move by the same amount. As Chant West says: “Most major super funds now invest beyond traditional asset sectors, with meaningful allocations to private equity, unlisted property and unlisted infrastructure which all delivered healthy returns for the year”.

But maybe it is a function of timing. Unlisted asset prices won’t stay immune from what is occurring in the listed space. Either they come down, or if listed asset prices improve, they just don’t go up.

Table 2 shows the returns in 21/22 from 4 diversified, multi-asset class ETFs from Vanguard. These funds invest in other Vanguard ETFs in accordance with their growth bias. For example, the Vanguard Diversified Balanced Index ETF (VDBA) has 50% in growth assets and 50% in income assets. The growth part is 20% Australian shares. 30% international shares (partly hedged), while the income part is 15% in Australian fixed interest and 35% in international fixed interest (fully hedged). In 21/22, each of these funds delivered a return of almost -10%.

Table 2 – Returns for Vanguard Diversified ETFs to 30/6/22.

How can you compare, and over what timeframe?

The first step is to categorize your fund (e.g., growth or conservative, super or pension). Whether you use a target asset allocation or the actual allocation on 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 22 (sources S&P. Bloomberg, Morningstar, MSCI).

Table 3 – Asset Class Performance to 30 June 22

If, for example, your SMSF was underweight international shares, then you may have underperformed over the last few years. International shares have outperformed Australian shares over most time periods, particularly over 3 years and out to 10 years.

The other notable standout from the data is the negative performance for Australian bonds in 21/22 and over 3 years. This was caused by the move higher in long term interest rates.
If your asset class mix was in line the target, but you still didn’t perform, that points to issues relating to how you allocate across sectors and to individual securities.

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.

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.