Self-managed super funds are the new black of investing.
It is almost fashionably required for any high net worth individual to have their own SMSF and they are becoming a major holder of superannuation assets.
According to the Australian Tax Office at the end of March there are 372,589 SMSFs operating on behalf of 718,800 members. Most impressively total assets in these (typically) "mum and dad" super funds has now topped $300 billion. Collectively the SMSFs manage more assets than all the industry funds.
But unlike the retail and industry public offer funds only the fund members and their advisers or accountants actually know how are performing.
In the late 1990s a study was undertaken by the independent actuaries Rice Warner who were given access to the performance records of SMSFs administered by a major accounting firm and a trustee company (anonymously of course). The results at the time were quite revealing because it showed that the SMSFs had performed broadly in line with market indexes after fees and had not dramatically outperformed as was the expectation. The performance attribution revealed significant cash holdings which had clearly dragged down the performance numbers during a period of strong sharemarket growth.
This week the industry research group Rainmaker in their Quarterly Roundup has tackled the SMSF performance monitoring from a different position. They took the ATO's data on how SMSFs invest their money - data derived from fund tax returns - and then used market index returns for the various sectors to estimate how the funds have performed.
Given that the asset allocation decision is widely accepted as being a primary driver of portfolio returns and volatility the Rainmaker approach is a sensible proxy for SMSF benchmark returns.
Before we look at the returns it is interesting to note that over the past decade SMSF's have clearly changed investment preferences. For a start the cash figure (around 50% a decade ago according to Rainmaker) is now around 20% and given that that includes fixed interest is a much more sensible and realistic asset allocation in line with professional fund manager practice.
Australian shares is the dominant investment class - more than 40% - with property being surprisingly low at 10%. But perhaps the biggest issue is that international asset exposure is almost negligible - unless SMSFs are investing offshore through managed funds which are about 19% of the assets.
When it comes to how the SMSFs performed as a group Rainmaker assumed fees of 1%. Over one year it gave SMSFs a return of 15.2% just a smidge behind not for profit funds but 2% ahead of retail funds. Over the three years the returns were much closer - 13.9 for not for profit funds, 13.3% for SMSFs and 12.4% for retail funds.
The retail funds lower performance is almost certainly down to higher fees and possibly higher exposure to international assets which have been hit by our dollar's appreciation.
If you have your own SMSF the Rainmaker work provides an interesting benchmark to measure yourself against. But do not just look at the total performance number. How much did you pay in fees? Calculate it as a percentage of assets for comparison purposes. If you want to account for costs fully perhaps consider putting in a fee for the time you spend administering or researching the fund's portfolio.
The tax office recently released figures that showed some small SMSF's were paying very high fees - up to 10% of assets - so if you are considering setting one up understand that they really only make sense on a cost basis once the account balance is substantial - above $200,000 is a common benchmark.
For the financial year just ended the performance comparison will be even more interesting because of the tough market conditions. Returns and fees are two dimensions to measure your SMSF on. Risk is the third leg of the equation and clearly over the past year that is an impact you cannot ignore as the portfolio manager of your family super fund.
