Are you good enough to run your SMSF?

PORTFOLIO POINT: How good/bad was your performance as SMSF investment manager last year? The number to beat was 3.35%.

Maybe, just maybe, if the Australian market hadn’t crapped out in the last two months of the financial year, SMSF trustees would all have a little more spring in their step.

As Australian shares are generally the largest holding of most Australian SMSFs – and Eureka Report readers tend to be no exception – the year to June 30 is one that will have been disappointing for most.

Australian shares were the worst performing major asset class of the last 12 months (see below). International shares were the next worst. Property’s performance – domestic and global – straddled their long-term averages.

Financial year 2011-12 was, without doubt, a year where the cautious were rewarded. The more defensive you were, the better your SMSF’s returns would have been.

There were numbers in safety. Cash and fixed interest ruled the roost.

Eureka Report has had a strong focus in recent years on the diversification values of fixed interest as an asset class. And, to put it bluntly, if you didn’t have fixed interest in your portfolio for the year to June 30, 2012, your results would have been anaemic at best.

But this is an annual column (for the previous years, click here (3/8/11) and here (21/7/10)), designed to show you the sort of returns that you should have been aiming for in your SMSF.

Below are the returns you could have achieved, if you had taken a passive approach to investment within your SMSF. Arguably, these are the figures you need to approximate, or beat, to justify your decision to run your own super. However, they don’t include platform fees charged by most non-SMSF providers.

As in previous years, I am using the returns of low-cost index fund provider, Vanguard, whose wholesale managed funds charge fees of between 0.15% and 0.4% (and they have reduced their fees further from August this year) for their “wholesale” funds. The “average” active fund manager charges around 1%.

And the returns of the individual sector funds (after fees) were:

• Cash Reserve Fund: 4.5%
• Australian Fixed Interest: 12.13%
• International Fixed Interest (hedged): 11.52%
• Australian Property Securities: 10.67%
• International Property Securities (hedged): 6.79%
• Australian Shares: -7.27%
• International Shares (hedged): 0.28%

What proportion of these numbers you picked up depends on your asset allocation, which should be determined, in part, by your risk profile. (For a simple risk profiling tool, seach for “risk profile questionnaire” at www.castellanfinancial.com.au .)

The following asset allocation table is the result of completing that risk profile.

Table 1: Asset allocation across risk profiles

As a SMSF trustee, you are the investment manager. You can choose to be overweight, or underweight, any asset class you choose. That’s your prerogative. The point of the above table is to give you an approximation of where your money would have been had you left it with your previous industry, government, corporate or retail fund.

So, if you plug in the performances for each asset class, what does that performance results does that come up with?

Amongst other things, it shows that a combination of Australian shares and cash would NOT have been a good combination this year. As in the last two years, with cash having a return of +4.5 and Australian shares returning -7.23%, those who have only cash and Australian shares would have likely finished up with a negative return.

Table 2: Returns from risk-profiled returns

*The percentages in these tables under the various asset classes are the weighted returns, based on the weightings in Table 1. For fixed interest and property, the weightings were 60% Australian and 40% international.

For the third year in succession, the mantra of proper diversification would have added to your returns.

Having international shares in your portfolio would have added to your overall performance. Though international only managed to eke out a positive return of 0.28%, it would have helped to balance out the impact of the negative return from Australian shares.

But speaking of three year returns, I’ve compiled the list of returns for three years also.

And the returns of the individual sector funds (after fees) were:

• Cash Reserve Fund: 4.34%
• Australian Fixed Interest: 8.35%
• International Fixed Interest (hedged): 8.63%
• Australian Property Securities: 11.92%
• International Property Securities (hedged): 27.31%
• Australian Shares: 5.28%
• International Shares (hedged): 13.03%

Over three years, you have been missing serious returns by not being diversified internationally, particularly in the areas of shares and property. International property has returned more than 27% compound over the three years to June 30. International property has doubled over that time.

Plugged into the same asset allocation table, you get the following results for the various risk profiles.

Table 3: Three-year risk profile performances

And looking at average three year returns of around 9% puts the performance of last year with Australian equities into perspective.

But that’s not to say that anyone should automatically pile into international assets now. In fact, for anyone with a contrarian bone in their body, it could be argued you should be doing the opposite of that.

I’m a bit contrarian by nature. While I’m glad I’ve had weightings to international shares in recent years, I will personally be overweight Australian shares in my equities allocation for the foreseeable future within my SMSF. (But that’s not a recommendation for you – you should seek advice tailored to your personal situation.)

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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are highly complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.