How super were your returns?

PORTFOLIO POINT: Look away now if your SMSF chose not to have any international exposure over the past 12 months. You missed the action. Again.

The moaning about the “stockmarket” has been so intense since the start of the year that I’d already made some assumptions about how bad returns from superannuation 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 in this regard. Every platform/fund manager has such a different view of what constitutes “balanced”, “growth”, “conservative” and so forth that trying to get a yardstick to compare your performance 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 style in that they hardly ever buy and hold.

It’s more like comparing apples with cricket balls, really.

But as an 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 from which you operate your own business.

So what’s a fair measure to compare your performance as SMSF trustee against? 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 against which Eureka Report readers could compare their performance. 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 handful of simple examples on the web from most major financial institutions as well as my own website.

Remember that a risk profile is only a guide. You may deliberately want to take higher or lower risks with your super. In any case, the results of a risk profile should help you with knowing what sort of returns you should be targeting.

Based on what you determine your risk profile to be, 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.

-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%

This year 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.

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 was beaten by 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 2009-10 and 2010-11, 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?

-Performance data for different risk profiles
Risk profile	Cash	Fixed interest	Property	Australian shares	International shares	Total
Secure	1.92	3.19	0	0	0	5.11
Defensive	0.96	3.19	0.81	1.04	1.59	7.6
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	0.8	1.62	4.64	7.97	15.02
High growth	0	0	1.62	5.8	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 past 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 result has been the same for two years in a row.

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 (for more on this, click here).

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 a weighted, diversified, returns such as the above, you can get a worthwhile June 30 performance figure.

SMSF voting systems that give more power to the trustees who account for the bulk of the funds may be illegal and leave those funds open to being sued, legal experts say. The tax office is investigating whether those funds whose trust deed weights members’ votes proportional to their balance may not be fair to all members. It is estimated that about 40% of total number of SMSFs are structured this way. The National Tax Liaison Group said the clause did not breach the 1993 Superannuation Act, but it might break trust law. Superannuation insiders believe that while Financial Services Minister Bill Shorten is under pressure to drop the opt-in rule for financial advice, a two to three-year condition is likely. In private briefings on the Future of Financial Advice reforms, the executives said product commissions would likely be banned but risk insurance commissions would be carved out from the package, and the best interest obligation would be adopted regardless of advisers’ current legal requirements. The ATO will consider delaying the start date for its draft ruling on death benefits payable on pensions. In July, the tax office ruled that once a pensioner died their pension lost its tax-free status and beneficiaries would have to pay income tax and capital gains on the assets, with a start date of July 1, 2007, which was when the tax-free pensions were introduced. The tax office has since said that as it is only a draft ruling, it will look at pulling the start date forward. SMSFs continue to bump up their cash and fixed interest holdings, according to a new survey from SMSF administrator Multiport. Its June quarter survey of 1600 SMSFs revealed that fixed interest holdings rose 1.3% to 12.3% of portfolios from the prior quarter while cash rose 1% to hit 22.8%, the highest level in 18 months. Ownership of Australian equities fell. About 14% of funds surveyed employed gearing, but of those loans 52% were for property and the remainder was for other financial assets.

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 author of Debt Man Walking.

• Superannuation Q&A, click here.