Eureka Correspondence

Calculating fund performance, term deposits confusion, and too much gloss on bonds.

Calculating fund performance

There is much in the media at the moment on how various funds performed and how SMSFs compare, if indeed the trustees know. It is fine to say the median return was “x%” and the top performers were “y%”, but can you inform us on the following:

1. Is the method for calculating these returns 100% consistent for every fund; and

2. How is a fund’s performance calculated?

It is the latter question that will help trustees do their own calculations given the extra variables of capital in and out, income, fees and taxes


Bruce Brammall’s response: I think there would be consistency across the various funds in a reporting sense. However, the problem with most of the stats that come out at this time of year on individual fund performance is that you don’t know what the individual funds were invested in. Most of the reason they have done well/badly will actually be because they have a higher/lower weightings to certain asset classes that performed well/poorly.

I understand your anguish. There is a lot of information coming from everywhere at this time of year and, to be frank, it’s very difficult for most people to get a proper understanding of whether they’ve done well or not, compared to the information that gets published.

And it is this reason that I put together my annual performance statistics to give Eureka Report readers something that is consistent. I have used the same methodology in putting together those stats for the last four years. In essence, that is, “here’s the return you would have achieved if you had left the investment decisions to a passive investment manager such as Vanguard, based on these defined risk profiles”. It assumes a level of diversification is built into your portfolio, partly so SMSF trustees can see how other asset classes performed and partly so they can see whether their active investment decisions not to use certain asset classes, or to go overweight in others, gave them outperformance or not. And I show you how I got those figures.

On the question of how does a fund determine their rate of return ... unless you’re using software, or have reasonable skills in Microsoft Excel, it can be very difficult to determine your actual return inside your SMSF, given you will probably have made investments ongoing during the year. Using a platform or a software solution is probably the best way to go, but it will generally come at a cost. Or do a couple of Excel courses.

Term deposits confusion

I am always interested in Robert Gottliebsen’s articles, but he has confused me recently with his comments on term deposits.  Early in July he wrote that he had some long-term deposits maturing, but he would not be renewing as rates were too low; and instead he would be looking to put funds into yield equities (see Six resolutions for a new financial year).  However, just a few weeks later he wrote that he had taken a five-year term deposit at 5% (see Banking on deposits still suits some investors).


Robert’s response: I have two funds: The large one which provides my income and the other to help pay for education for my grandchildren. The second, much smaller fund invests only in five-year bank deposits, which after five years roll over annually. I do not want to take market risk in this fund. The main fund will not invest in bank deposits for the reasons I isolated. I agree it was confusing – sorry.

Best wishes, Robert.

Too much gloss on bonds

Elizabeth Moran’s article, Taking the plunge on bonds, glosses over the very real capital risk for bonds when we are likely approaching a bottoming out of interest rates here after that point has already been reached on most global markets. This could well be just about the worst possible time to buy bonds as a medium/long-term investment, but where is the explanation of the risk of a rate rise not too far down the track?

“Selling” the product should not be at the expense of balanced commentary and I’d have expected a much better mix of advice on this subject than “the great opportunity...”. Eureka Report is only useful to its readers if it doesn’t fall into the trap of flogging product (we have too many doing that already) at the expense of considered reporting and unbiased, balanced and objective advice.

Name withheld

Elizabeth’s response: Unfortunately it’s a common misconception that all bonds are fixed rate and that in a rising interest rate environment you would not own bonds. For some time I’ve been suggesting we’re nearing the low point in the interest rate cycle and it would be good to consider changing emphasis of your bond portfolio from fixed-rate bonds to floating-rate notes (FRNs) and inflation-linked bonds. For example, see Bonds case has added weight.

It is true that fixed-rate bond prices will fall when interest rates rise, but these are tradeable securities and for those concerned with maximising income, fixed-rate bonds offer very good returns compared to term deposits in the current market.

The article includes three types of bonds and not just fixed rate bonds. FRNs are more capital stable and interest will rise as interest rate expectations rise. Equally inflation-linked bonds are linked to the CPI, which typically increases in a growing economy. So your comment regarding “the worst possible time to buy bonds” does not account for the complete range of bonds on offer which perform best under different times in the economic cycle.

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