How does your SMSF measure up?

PORTFOLIO POINT: The stats to June 30 are finally in. Today, rate your own performance as an SMSF investment manager for FY2010.

For the first year in three, most super fund members and trustees won’t have to close one of their eyes when they see the performance of their super fund.

Unless you took a particularly unusual and undiversified risk that didn’t pay off (at least in the financial year just ended), performances were positive all round. Phew.

DIY trustees largely know that the control they were able to exercise over their funds during the dark years of 2007-08 and 2008-09 gave them an edge. And Super System Review chairman Jeremy Cooper confirmed it all, giving a big tick of approval to the investment prowess of Australia’s SMSF industry in his draft reports. (However, that still hasn’t stopped him wanting to curtail what you can invest in.)

So, given 2009-10 was a good year all round, what should you and yours SMSF have made?

The magic number this year is … 12.45%.

That’s not the magic number for everybody. But that’s what a reasonably well diversified portfolio of assets run by professionals would have got you for a very small fee.

That is, that’s what a well-balanced portfolio of Vanguard index funds would have got you, without you having to spend any of your precious time acting as a trustee, investment officer, fund manager and administrator – the chores that form part of your decision to run your own super fund.

But that’s just a “balanced” fund. In the tables that follow, we’ll give you something to compare yourself with if you are more, or less, aggressive than the “average” investor. Those who were fully invested in equity and property markets should have done closer to 15%, while even those who had been hoarding cash and bonds should have been around the high single digits.

So, how are the figures worked out? I have used six risk profiles, going from a “high growth” allocation (100% shares and property) down in 20% increments to “secure” (100% income investments). As an asset allocation table, it looks like this.

Table 1: Risk profiles and asset allocation

I have used the following Vanguard funds exclusively and they are teamed with the performance for the year.

• Cash Reserve Fund: 3.71%
• Australian Fixed Interest: 7.55%
• International Fixed Interest (hedged): 9.15%
• Australian Property Securities: 20.15%
• International Property Securities (hedged): 41.78%
• Australian Shares: 12.78%
• International Shares (hedged): 13.96%

For the performance table below, I’ve used a split of 65% Australian and 35% international to get a combined return for both fixed interest and property.

Table 2: Performance data for different risk profiles (all are percentages)

I realise most SMSF trustees don’t want to compare themselves to an average balanced fund, or even managed fund super account. That’s often what they were trying to escape. But if it’s what you were trying to escape, then beating it is probably as good a measure as any that you’ve done, or are doing, the right thing.

You need something to compare yourself to. And while the superannuation industry is yet to report their actual results for 2009-10, we can try to give you some benchmarks.

As you can see, classically diversified portfolios had a pretty good year. Certainly anything positive was going to be a relief following the returns of the previous two years.

That’s a plain vanilla investment strategy. When the super fund figures come out in the next few weeks, this is roughly the sorts of figures that should be reported.

The best performing major asset class was international property, hedged in Australian dollars, because of the Aussie’s appreciation against the $US over the financial year. For those who were in an unhedged international property portfolio for the whole year, the return was a still respectable 31.15%.

It’s important to note a few things.

First, asset classes performed, roughly, according to risk. Cash performed worse than fixed interest, which was beaten by both shares and property. Property was out of order in that it beat shares, but that’s partially because property took a bigger hammering than shares during the Global Financial Crisis.

Therefore, the more risk you took in 2009-10, the more likely you were to have been rewarded.

Second, diversifying offshore paid off. In shares, property and fixed interest, international markets outperformed the Australian equivalents. Australia’s relatively high interest rates would have stopped it being a clean sweep. Being too focussed on Australia probably cost you money.

Third, most SMSF trustees don’t necessarily like to have themselves defined by classical investment diversification tables and so are unlikely to have asset allocations that read like the above. Sure, but you still need something to compare yourself to and that’s the point of today’s exercise.

These tables don’t take into account calculated risk taking, such as a concentrated equity portfolio, geared property (which would have been a great performer in 2009-10), or taking specific risks in international markets. Those holding cash and locking it up for term deposits could have done far better than the 3.71% acheived by Vanguard’s cash reserve fund.

Fourth, the figures assume being fully invested in each asset class for the entire year and do not take into account an important flexibility of being a SMSF trustee – being able to time your purchases. Patient investors can pick up bargains, can time moving from hedged to unhedged investments and can spend part of the year in cash and other parts partially, or fully, invested.

Fund managers don’t have that flexibility. If you don’t like the look, or feel, of markets, then you can be out as fast as you can click sell buttons. If you want in, you can take advantage with lightning speed without dragging the market with you.

One of Cooper’s main criticisms of the SMSF industry was the lack of performance comparison data. That won’t be easy to change, given SMSFs don’t have to lodge tax returns until very late in the following financial year. Speaking of which …

*****

Consistent failure to lodge your SMSF tax return could have just made you a target of the Tax Office and put you in danger of losing nearly half of your super fund.

The ATO has just started contacting accountants with clients who are repeat offenders when it comes to failing to lodge their returns.

The ATO has the power to fine a SMSF up to 46.5% of its assets – not just its income – if it is deemed to be non-compliant. If you get a call from your accountant to say your fund has been queried, don’t put it off any longer. It sounds like the new deadline is August 31.

Many in the accounting fraternity believe the ATO’s position might be a little too harsh. Many funds facing delays might be in that position because of death, or divorce.

The ATO’s response was, essentially, that people only die once and don’t tend to divorce every year. They are currently after only those who have consistently failed to lodge.

*****

None of the recommendations in this article should be taken as personal investment or financial advice. Some funds discussed may not have recommendations. In any investment program, your personal situation and needs should be taken into account. Please see your adviser/s before implementing any major changes to your investment program.

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