(03) 9020 2905PORTFOLIO POINT: How did your SMSF’s performance measure up at June 30? Look away now if you didn’t have any international exposure. You missed the action. Again.
The moaning about the “stock market” has been so intense for so many months (April through July), that I’d made some assumptions about how bad super returns would be this year.
They seemed certain to be somewhat less than ordinary. But that wasn’t the case. As has already been reported, super fund returns were reasonably healthy for the year to June 30.
But the figures reported on the average “balanced” funds don’t really mean much, in my opinion. Comparing apples with apples is almost impossible. Every platform/fund manager has a different view of “balanced”, “growth”, “conservative”, etc, that trying to get a yardstick to compare yourself by is, at best, extremely difficult.
On top of that, most fund managers are using active managers, with active manager fees, which may have also had negative tax consequences associated with that money management style – they are hardly buy and hold.
Comparing apples to cricket balls, really.
As a SMSF trustee, you are probably doing the heavy lifting yourself.
You might specifically choose to hold only assets that you are comfortable with. And, that may well be Australian cash and Australian shares. Or business real property, if your super fund’s major asset is the commercial property out of which you operate your own business.
What’s a fair measure to compare your performance as SMSF trustee to? That can be tough. Most people probably use some balanced fund return. None of that is really of much value, or particularly scientific.
So, last year with this column, I created my own yardstick for Eureka Report readers to have something to compare themselves to.
The yardstick uses my own blended diversified portfolios, with Vanguard’s return as a base. Vanguard is a low-cost index fund provider, that provides a number of other benefits, such as low turnover.
First, it’s important to understand what sort of risk profile you’re looking to compare yourself to. If you haven’t completed a risk profile before, you’ll find a reasonable, yet, simple one at Castellan’s website by clicking here. It will take about five minutes to complete.
A risk profile is only a guide. You may be deliberately wanting to take higher or lower risks with your super.
In any case, that document should help you with knowing what sort of returns you should be targeting.
Based on what you determine to be your risk profile, the following table gives you a rough idea of how traditional diversified portfolios should look. Everyone will have a different opinion on this, so this is just my current thinking.
Table 1: Risk profiles and asset allocation
| Asset Class |
Capital Safe |
Defensive |
Conservative |
Balanced |
Growth |
High Growth |
| Cash |
40% |
20% |
10% |
5% |
5% |
0% |
| Fixed Interest |
60% |
60% |
50% |
35% |
15% |
0% |
| Property |
0% |
5% |
10% |
10% |
10% |
10% |
| Australian Shares |
0% |
9% |
17% |
28% |
40% |
50% |
| International Shares |
0% |
6% |
13% |
22% |
30% |
40% |
| Total |
100% |
100% |
100% |
100% |
100% |
100% |
I have used the following Vanguard funds exclusively and they are teamed with the performance for the year. The performance figures have come from the Vanguard website, from the wholesale fund offers.
Cash Reserve Fund: 4.8%
- Australian Fixed Interest: 5.3%
- International Fixed Interest (hedged): 5.34%
- Australian Property Securities: 5.48%
- International Property Securities (hedged): 36.11%
- Australian Shares: 11.59%
- International Shares (hedged): 26.57%
Even before we look at how these blended into performance tables, what is obvious is that if you didn’t have some sort of allocation to hedged international assets, you will have underperformed. Also, assets performed roughly in line with their risk expectations. That is, cash has beaten fixed interest, with property and shares outperforming again in that order.
(I’ve used the hedged versions, as I will consistently for this annual column, to take out the impact of movements in the Australian currency. And, certainly, for FY10 and FY11, that would have been beneficial. It won’t be every year.)
If you didn’t have international property (36.11%) and international shares (26.57%) in your portfolios, the chances of getting a double digit return from your portfolio for the year to June 30 were slim.
For the performance table below, I’ve used a split of 65% Australian and 35% international to get a combined return for both the fixed interest and property sections. And while this didn’t make a huge difference for fixed interest, it was enormous for property.
So, what sort of return did your risk profile suggest you should be comparing yourself to this year?
Table 2: Performance data for different risk profiles
|
Risk |
Cash |
Fixed |
Property |
Australian |
International |
Total |
|
Profile |
|
Interest |
|
Shares |
Shares |
|
| Secure |
1.92 |
3.19 |
0.00 |
0.00 |
0.00 |
5.11 |
| Defensive |
0.96 |
3.19 |
0.81 |
1.04 |
1.59 |
7.60 |
| Conservative |
0.48 |
2.66 |
1.62 |
1.97 |
3.45 |
10.18 |
| Balanced |
0.24 |
1.86 |
1.62 |
3.25 |
5.85 |
12.81 |
| Growth |
0.00 |
0.80 |
1.62 |
4.64 |
7.97 |
15.02 |
| High growth |
0.00 |
0.00 |
1.62 |
5.80 |
10.63 |
18.04 |
(Please note: the actual returns for each asset class are above. These figures for the asset classes represent the weighted return that leads to the “total” in the final column.)
One thing to note, the “typical” balanced managed-fund super provider will NOT be reporting 12% plus this year. These figures are before taxes and fees. Also, their concept of “balanced” will be different to what I’ve used here, so it’s that apples and cricket balls thing.
For the last two years, hedged international property has been the star performer. If this year’s 36% return impressed, then the previous year’s nearly 42% means that even small allocations to that asset class would have delivered significant benefits. (Whether it is too late to get on that bandwagon is a question I’ll leave for someone else to answer.)
But roughly, the more risk that you took with your portfolio, the better you would have performed. That’s for two years in succession now.
Those who stayed in larger cash holdings on the sidelines might have been able to sleep easier at night. But it has come at a cost.
And I am certainly hearing more evidence of SMSF trustees being anxious about getting back into the market after being burnt during the GFC. It is both fear and inertia that is combining to hold them back.
It hasn’t been an awful time to be doing that. Australian interest rates have been rising and if you’ve had plenty of money sitting in term deposits, you will have been outdoing the 4.8% return delivered by Vanguard’s cash reserve fund.
But you do need some sort of yardstick to compare yourself to. By measuring yourself against weighted, diversified, returns such as the above, you can get a worthwhile June 30 performance figure.
*****
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 advised to consult your financial adviser.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.