(03) 9020 2905PORTFOLIO POINT: How well did you do your job as SMSF investment manager last year? You needed to beat 14.81%.
Unless you were still bunkered down in the ultra-defensive end of the investment world, the financial year ended 30 June should have been a good one for you.
A ripper of a year for Australian shares was countered by a dismal year for cash.
Without doubt, it was a year for taking risks. If you weren’t taking any, you missed out big time. The reward for risk was everywhere – not just Australian shares, but international shares and domestic and international property.
While Australian shares, including dividends, grossed nearly 22% (and that’s with a roughly 8% decline in Australian shares prices during May and June), international shares pipped them (nearly 25%). See below for the performances of other asset classes.
But the point of this annual “performance benchmarking” column is to give you an idea on what you should have made last year. And, for the “average” investor, the overall return was 14.81%. (To see previous columns, see 25/7/12, 3/8/11 and 21/7/10.)
If you consciously chose to take higher risks, then the performance you should have been aiming at was somewhere between 19 and 23 per cent. If you were deliberately more defensive than the average, your returns should have come somewhere between about 3% and 11%.
The performance figures for FY13 (Table 2, below) are, roughly, what you would have made if you had you left the investing to a passive index manager such as Vanguard (whose figures we are borrowing from heavily today). So, if part of your brief, to yourself when you set up the fund, was to beat investment managers, then this is one way you can do it.
What assets were you holding?
SMSFs tend to be overweight two particular asset classes – Australian shares and cash. And while it was a strong year for equities, it was a particularly weak year for cash. Holding too much in the latter would have made a double digit return very difficult.
As the trustee of your SMSF, if you are also acting as investment manager, you have no one to blame but yourself for underperformance. The upside is that you get to claim all the credit when you get it right.
What do you benchmark yourself against? That will depend partly on what it is that you’re trying to achieve from an investment perspective and from the point of why you’re running a SMSF.
So, as someone who actively manages their super, these figures are ones that you can use to compare whether you added significantly to your super fund’s performances – or detracted from it.
The returns of the individual Vanguard sector funds (after fees) were:
- Cash Reserve Fund: 3.07%
- Australian Fixed Interest: 2.56%
- International Fixed Interest (hedged): 4.1%
- Australian Property Securities: 23.77%
- International Property Securities (hedged): 15.4%
- Australian Shares: 21.68%
- International Shares (hedged): 24.63%
What mixture of those determines what you should have got as your return. That depends on how much risk you were prepared to take last year. (The following figures are based on the risk profile available at www.castellanfinancial.com.au ). This is, very broadly, the sort of asset mixes that professional investment managers use for funds or clients.
Table 1: Asset allocation across risk profiles
| 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% |
Trustees often choose to start their SMSF because they want to take their own risks and have a hand in their own returns. You don’t have to follow benchmarks. But it is advisable to have something to measure yourself against.
This exercise is partly to show the benefits of diversification.
Last year (FY2012), Australian shares were the worst performing asset class of the seven we’ve considered. Cash was the third worst-performing.
It’s a different story this year. Australian shares were the second best performer and cash ranked six of seven.
So, here are the performance figures that you should consider for your own benchmarking for FY13.
Table 2: Returns from risk-profiled returns
|
Risk |
Cash |
Fixed |
Property |
Australian |
International |
Total |
|
Profile |
|
Interest |
|
Shares |
Shares |
|
| Secure |
1.23 |
1.86 |
0.00 |
0.00 |
0.00 |
3.09 |
| Defensive |
0.61 |
1.86 |
1.04 |
1.95 |
1.48 |
6.94 |
| Conservative |
0.31 |
1.55 |
2.08 |
3.69 |
3.20 |
10.83 |
| Balanced |
0.15 |
1.08 |
2.08 |
6.07 |
5.42 |
14.81 |
| Growth |
0.15 |
0.46 |
2.08 |
8.67 |
7.39 |
18.76 |
| High growth |
0.00 |
0.00 |
2.08 |
10.84 |
9.85 |
22.78 |
*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. The figures under individual asset classes are the total percentage that these asset classes would have added to your portfolio.
While Australian shares were a great performer in FY13, you would have added to your portfolio’s performance by having international shares in there.
Having property in your portfolio would have also helped things. Australian real estate investment trusts (REITs) posted a gross of nearly 24%, while international REITs posted 15.4%.
After a stellar five-year run, fixed interest was the major disappointment for the full financial year. If you went back to about March, when the numbers for fixed interest started coming off the boil, it was sitting at near 8% for a five-year period and was THE asset class to have been in since the GFC.
However, Australian fixed interest was the worst performing asset class at 2.56% and international wasn’t a whole lot better at 4.1%.
Interesting, also, is the performance gap on Australian shares versus international shares.
When I first joined Eureka Report, in January 2008, I said that the outperformance of the Australian share market in years leading up to that point mean that it was probably time to make a switch to international shares for SMSF trustees.
Turns out I was right. The massive underperformance of the international share market, compared to returns locally, has been reversed over the ensuing five years.
But are we at the tipping back point?
Australian shares have returned on average, 8.25% and 2.7% over the last three and five years, respectively. International shares have done 16.6% and 5.04% for the same periods, including stellar runs on the US Dow Jones in recent years.
Depending on how much you’ve got invested, them’s big bikkies.
*****
But let’s look at the three-year returns across the board.
The returns of the individual sector funds for Vanguard (after fees) were:
- Cash Reserve Fund: 4.12%
- Australian Fixed Interest: 6.59%
- International Fixed Interest (hedged): 6.94%
- Australian Property Securities: 13.05%
- International Property Securities (hedged): 18.82%
- Australian Shares: 7.98%
- International Shares (hedged): 16.52%
If we plonk those figures into the same asset allocation table as used above, we end up with the following three-year returns for each risk profile.
Table 3: Three-year risk profile performances
|
Risk |
Cash |
Fixed |
Property |
Australian |
International |
Total |
|
Profile |
|
Interest |
|
Shares |
Shares |
|
| Secure |
1.65 |
4.03 |
0.00 |
0.00 |
0.00 |
5.68 |
| Defensive |
0.82 |
4.03 |
0.75 |
0.72 |
0.99 |
7.31 |
| Conservative |
0.41 |
3.36 |
1.51 |
1.36 |
2.15 |
8.78 |
| Balanced |
0.21 |
2.35 |
1.51 |
2.23 |
3.63 |
9.93 |
| Growth |
0.21 |
1.01 |
1.51 |
3.19 |
4.96 |
10.87 |
| High growth |
0.00 |
0.00 |
1.51 |
3.99 |
6.61 |
12.10 |
What we get to see here, versus the same table from last year, is a widening of the spread between “secure” and “high growth”. Last year, the spread was 6.8% to 9.58% for the three year period.
This year, because of the poor performance of cash and fixed interest, the spread has widening considerably. At the bottom, it’s 5.68% and at the top end it’s back into double figures at 12.1%.
*****
Last year, I said: “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.)”
Hindsight proves that worked reasonably well, even if international shares pipped domestic in FY13. I hope your investment strategy in the last 12 months worked well for you.
But thinking ahead, while international got ahead (just) this year, can they, as an asset class, continue to outperform as they have so dramatically over the last three and five years? That’s not where my money will be. Personally, I’m tipping new monies into Australian shares and residential property.
*****
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.