Contrary to many forecasts a decade ago, choice of super fund hasn’t turned out to be a winner for retail funds or industry funds. Instead, self managed super funds (often derided as do-it-yourself operations), have become the dominant sector of the $1.7 trillion industry.
In fact, over the five years to June 2013, when superannuation’s total funds grew by 42% (or $474 billion), SMSFs contributed the largest proportion of overall growth at 37%. According to the latest statistical overview from the Australian Taxation Office, this growth was far faster than industry funds (27%) or retail funds (17%).
It’s clear that the combination of the GFC’s effect on returns, and the growing numbers who want control of their own funds, has been a major factor in the growth of SMSFs. In addition, lower expense ratios over four of the last five years, enabled SMSFs to outperform, on average, other APRA regulated funds.
There weren’t any exotic investment strategies; SMSF trustees simply put their money directly into cash and short term deposits and Australian listed shares – a combination of safety and growth. In the two negative years of 2007-08 and 2008-09, SMSFs kept their losses to 2% to 5% less than APRA funds and matched the bigger competitors in two of the other three years.
Size does matter
The ATO’s detailed figures show a direct relationship between the size of the fund and returns. Indeed, in 2010 and 2011, only funds with more than $100,000 of assets had positive returns. In 2012, on average only SMSFs with half a million or more had positive returns.
SMSF return on assets. by fund size
Source: ATO’s Self-managed superannuation funds: A statistical overview 2011-2012
Similarly, all SMSF’s overall operating expenses fell in each of the four years to June 30, 2011 – from 0.68% to 0.56% of assets – and remained stable in 2012. Again, bigger SMSFs did best: funds with over $2 million of assets averaged expense ratios of under 0.5% while funds with assets between $200,000 and $500,000 were around 1.5%.
Satisfaction guaranteed
As a result, SMSF members are the happiest fund members. Numbers from a recent Roy Morgan survey shows retail fund members were unhappy with their fund’s performance in 2012-13. Retail fund members were only 45.5% satisfied with the financial performance of their funds (for the six months to August 2013). AMP was the poorest performer among the major retail funds and had only 39.1% of satisfied members – marginally better than 47.7% for CBA. However, nearly 71.6% of SMSF fund members were happy with their fund’s performance.
Little wonder, then, that SMSFs are the big winners from fund members’ switching products, according to the Roy Morgan Superannuation and Wealth Management Report. Several banks (the NAB and ANZ) were net losers from switching while rivals gained slightly: CBA got 3.1% of switches and Westpac picked up 1.7%. But SMSFs were the biggest gainers with a net 9 % of super fund switches.
Anecdotally, many SMSFs are created as members near retirement and opt for simplicity in their fund and safety in their investments. These strategies worked in the post-GFC recovery, although there may be a hidden danger in some portfolios.
Diversification needed
Over the difficult last five years, the ATO says there has been an increase to 14% in the proportion of SMSFs holding all of their investments in just one asset class. That might work when the stock market returns 15%, but we know the market returns can fluctuate wildly.
Similarly, bank term deposits were fine when rates were high single digits but, if current levels continue for another year, many funds (especially any paying tax) will struggle to beat inflation.
The percentage of funds using borrowings to leverage returns from property have risen – though not by as much as critics imagine. At the end of 2012, only some 3.7% of SMSFs had borrowings, accounting for just over 1% of total assets. Although even a small number relying on leverage to increase returns may, belatedly, find it a risky practice, that’s hardly a number to create alarm.
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.
Also in the Switzer Super Report:
- Roger Montgomery: A good-value medical opportunity in LifeHealthcare [1]
- Penny Pryor: SMSFs square up for battle [2]
- Penny Pryor: How to buy international shares [3]
- Tony Negline: Three important super issues you need to know about [4]
- Question of the week: Are insurance companies worth holding on to – or buying? [5]