If you’re 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 3.5% over a 10-year period, if your fund has been growing at 7.5% 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 2023/24
Due to the performance of the share market, in particular overseas shares, most super funds will report positive returns for 23/24. According to industry research group Chant West, the median public offer ‘growth’ fund delivered a return of 9.1%.
Since the introduction of compulsory super in 1983, growth funds have experienced negative yearly returns on five occasions, the last in 21/22. This is a ratio of 1 in 6 years, better than the risk expected frequency of 1 in every 5 years. The chart below shows the year by year performance.
Growth Funds – Financial Year Returns
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 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 24
The returns are after investment fees (but not administration fees) and after tax (assumed to be at a rate of 15%). Funds in pension mode, which aren’t paying tax, would have higher investment returns.
There is a ‘question mark’ about the returns of super funds that hold significant investments in unlisted assets, such as commercial buildings, private equity or infrastructure. While these assets are valued by independent valuers, it is not a particularly transparent process and there is often a lag between valuations in traded markets and valuations for illiquid assets.
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 2 shows the performance of the major asset classes over the periods to 30 June 24 (sources S&P, Bloomberg, Morningstar, MSCI).
Table 2 – Asset Class Performance to 30 June 24 – Total Returns
The “star” asset class last year was international shares, and if your SMSF was underweight international shares, then you may have underperformed last year. Interestingly, international shares have outperformed Australian shares over most time periods.
The other notable standout from the data is the poor performance of Australian bonds. While positive at 3.7% in 23/24, the negative return in 21/22 when interest rates started to move higher means that the three and five year returns are negative and over 10 years, the average return is only 2.2% pa.
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.
