Why SMSFs outperform large super funds

My Super Fundby Andrea Slattery   16 Sept 2015
Australian Financial Review

Suddenly, it seems, cash is king again. The Future Fund has shifted another $5 billion into cash since March, taking its cash holdings to more than 20 per cent of its $117.2 billion portfolio.

The fund had just declared a healthy 15.4 per cent return for the year to June 30, 2015, so when managing director David Neal said there was a “defensive” element to this heavier weighting in cash, it grabbed the industry’s attention.

But there were no mutterings about the fund being overweight in cash – a 15.4 per cent return earns respect.

It’s a far different story for self-managed superannuation funds, however, which are regularly taken to task for holding too much cash. Australian Prudential and Regulation Authority-regulated funds and an assortment of other critics (mostly with a vested interest) never miss an opportunity to point the bone at SMSFs and their cash holdings, which they say are evidence of a lack of investment acumen.

Unfortunately for these critics, Australian Taxation Office figures do not support their argument. The latest figures, to June 30, 2013, show that for the previous seven years, SMSFs have outperformed the larger super funds, averaging an annual return of 4.33 per cent, compared with 3.69 per cent for the super funds. Neither of those average returns is cause to break out the champagne, but it includes the global financial crisis and two consecutive years of losses.

Looking closely at the figures, what they show is that SMSFs do better when markets perform poorly, while APRA funds get a spring in their step in bull markets.

In the year to June 30, 2007, SMSFs returned 16.7 per cent compared with 14.5 per cent for the APRA funds. In the following two years, when all super funds were in negative territory, SMSFs contained their losses far better. In 2008  and 2009 they lost 5.9 per cent and 6.7 per cent respectively, whereas APRA funds lost 8.1 per cent and 11.5 per cent over the same periods. The SMSFs’ weighting in cash, Australian blue chips and property proved a sturdy defence.

HELD THE EDGE

In the following four years to 2013 the larger funds held the edge, although in 2011 the difference was a minuscule 0.1 percentage point and in 2012 only 0.3 percentage points. The only year where the larger funds clearly outperformed SMSFs was in 2013, of which more later.

In addition, the evidence suggests they are engaged with their fund, and are prepared to get specialist advice. The latest figures from the 2015 Intimate with Self-Managed Superannuation report show 60 per cent of trustees either completely outsource the fund’s operation or seek assistance to run it.

This engagement with their fund was highlighted by the researcher Investment Trends in its 2015 Self-Managed Super Fund Investor Report. From 2011 onwards, SMSF trustees were realigning their portfolios to reflect a renewed interest in growth after three years of making capital preservation and a sustainable income stream their two priorities. The general investment community did not switch to the growth story until early 2014.

Trustees are not sitting still. Before August’s market implosion in the wake of China’s three devaluations they were already adopting a more defensive position as markets became more volatile. Cash rates might be at historical lows, but they are positive.

There is another important aspect to this. As the ATO statistics show, the best-performing year for the larger funds was in 2013, with a key factor being international equities kicking in with strong returns (likely to be repeated in 2014 and 2015) – an asset class largely absent from SMSF portfolios.

There are two key reasons why trustees have not ventured offshore: trustees and advisers generally lack knowledge about these markets; and they are very difficult to access. But this is changing, with the latest research showing a growing interest in overseas equities, either via managed funds or directly.

SHIFT AWAY

It’s not just overseas equities. As Australian shares have gone off the boil, there has been a shift away from direct share investments and a move to unlisted and listed managed funds and, the new flavour of the month, ETFs (an increase in value in Australia of 53 per cent in the 12 months to April 2015).

Their advisers are preaching the virtues of diversification – and trustees are listening. Remember, too, some asset classes, such as infrastructure, are typically out of reach of SMSFs – a point we have made to numerous government inquiries.

Interestingly, property investment has been steady for SMSFs. This outcome stands in stark contrast with the hysteria that surrounded the issue of SMSFs using leverage through limited recourse borrowing arrangements (LRBAs) to buy residential housing. Any spruikers trying to entice potential trustees into this market have had ASIC’s regulatory authority knocking on their doors.

The reality is the statistics regarding LRBAs and residential property never supported the contention that the acquisition of residential property had the potential to wreak financial havoc across the SMSF sector. On the latest ATO statistics to March 31, 2015, LRBAs comprised 1.6 per cent of the average SMSF portfolio and residential property 3.7 per cent.

Although the rate of growth of SMSFs is slowing, mainly because of  Baby Boomers retiring and drawing down their pensions, at about $600 billion funds under management  and more than half a million funds they remain the biggest superannuation sector.

By any measure, it has been a remarkable success story, especially given the market conditions post the global financial crisis. But don’t hold your breath waiting for SMSF critics to acknowledge this.


Original article here

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