Did you beat the super benchmark?

SUMMARY: Did you have a good year as investment manager for your SMSF? The answer is “no” if your portfolio didn’t return 13.8%.

It’s not just double digits for the second year in succession, it’s the second year in the teens.

If you’re chasing returns – which we all are to a degree, each with our own take on how much risk we’re prepared to take for that return – it was another year that favoured the brave.

As it turned out, the more aggressively you invested – according to classical investment theory in any case – the better you would have performed in FY2014, as was the case in FY2013.

Australian shares spent the vast majority of the year above 5000 points and is now looking, potentially, at moving above 5500 points, a level which has not held for an extended period since prior to the market capitulation in 2008.

It was an abysmal year for cash. Interest rates hit their lowest point in five decades in the first half of the financial year and haven’t improved a jot since.

And they’re the two asset classes that SMSFs tend to be overweight in – Australian shares and cash.

The point of this annual performance column, now in its fifth year, is to show SMSF trustees what sort of return they could have got had they not agonised over all of their investment decisions and, instead, left those decisions to an index fund manager, who charges relatively nothing for a return that will go within a poofteenth of meeting a widely acceptable set of benchmarks.

These are the results that could have been achieved by taking a hands-off approach to investing. I realise that that is not why most of you become SMSF trustees, but if you need a bench mark, and if part of the reason that you started your own SMSF is so that you didn’t have to pay a fund manager a fee for underperformance, then comparing yourself to a low-cost index fund is one way of having a yardstick for your own performance as investment manager.

The standard that we have been consistently using for this column (explained below) means that a “balanced” return of 13.8% could have been achieved, if investment decisions were left to the professionals at index fund manager, Vanguard.

That is the return calculated from a “balanced” investment approach that takes in all of the asset classes – not just shares and cash – with the minimal costs associated with index funds. But we’ll cover more and less aggressive risk profile investment options also.

Many people get into SMSFs because they want to take control of their investments. That’s fine. But many, in doing this, decide to ignore asset classes about which they have no knowledge, or don’t have a particular interest.

If that leads you to only invest in one or two asset classes, then you are lacking diversification. That’s also your decision and your discretion, so long as you are aware of the risks you’re taking. One of the many uses for index funds can be to index asset classes about which you don’t feel confident making your own active investment decisions.

Had you decided to index individual portions of your returns for the year, here are the returns you could have received.

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

• Cash Reserve Fund: 2.54%
• Australian Fixed Interest: 5.89%
• International Fixed Interest (hedged): 6.93%
• Australian Property Securities: 10.93%
• International Property Securities (hedged): 16.27%
• Australian Shares: 17.07%
• International Shares (hedged): 24.63%

I haven’t listed those in order of returns – it is coincidence. It’s the same way I list them every year, which is in order or risk according to classic investment theory, which includes that Australian asset classes would be lower risk than the same international asset classes.

And what this showed was that if you weren’t in international assets – particularly international shares – you were likely suffering a drag on your own performance.

In fact, for the fifth consecutive year, currency-hedged international shares have beaten the returns from Australian shares. Surely, that can’t continue (though I said that last year also). It’s a record that has to be broken sooner rather than later, based on probabilities.

Those asset class performances are then added to asset allocation tables in the following percentages.

Table 1: Asset allocation across risk profiles 

And this leads to a range of performance data for each of the different risk profiles.

The following covers the one-year performance for each risk profile – compare your own performance to whichever you believe most resembles your personal tolerance to risk (or do a risk profile. There’s one available if you search my website at www.castellanfinancial.com.au) .

Table 2: One-year performance across risk profiles 

Note: The performance figures under the asset classes is the amount, in percentage points, that the asset class contributed to the “total” column.

To see the equivalent comparative returns for this same series in previous years, see my columns of 22/4/13, 25/7/12, 3/8/11 and 21/7/10.

The aim is to give you, as a SMSF trustee, as close as I can a figure that roughly equates to what you could get if you largely get if you decided to hand over responsibility of your investments to an index fund manager.

And when it comes to three-year performances, the story is similar, though not as smooth.

The returns of the individual sector funds for Vanguard (after fees) for three years were:

• Cash Reserve Fund: 3.37%
• Australian Fixed Interest: 6.79%
• International Fixed Interest (hedged): 7.44%
• Australian Property Securities: 14.96%
• International Property Securities (hedged): 12.74%
• Australian Shares: 9.72%
• International Shares (hedged): 15.93%

While international shares are the top performing asset over the period, Australian and international property securities come in second and third.

Fed with the same percentage allocations into the three year investment table, we get the following.

Table 3: Three-year performance across risk profiles 

The performance of a balanced fund over a three-year period has topped 10% for the first time since before the GFC, I would suggest.

The gap between secure and high growth has continued to widen over the last few years, meaning the lower the risk that an investor has been prepared to take, the more their performance has suffered. That’s in recent year only.

For FY12, the gap was just 2.78% between secure and high growth. That gap more than doubled to 6.42% for FY13 and has further widened to 7.09% for FY14.

*****

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 extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au