Where SMSFs can turn for 'validation'

Trustees of self-managed super funds can build some investment confidence if they follow the simple rules of allocation and diversification.

• DIY fund members savour control of their retirement savings
• But many of them lack confidence
• They will avoid investment risk by following two simple rules

The global financial crisis sent a chill up the spine. There’s a common belief the GFC bypassed Australia, but that’s just not true. Between October 2007 and March 2009 the local share sharemarket lost 52% of its value.

Destruction of wealth to that scale is felt most keenly by those who get out at the bottom and put their remaining capital in cash.

A lot of people did just that.

Then, they set up self-managed superannuation funds.

And now, they are struggling to make sense of the investment market.

These conclusions are drawn from a survey by AMP of 1000 of its SMSF investor clients.

Nearly half of respondents set up their DIY funds after 2009 and 53% said they did so because they wanted better control.

But 43% sought advice for validation of their own investment ideas, and 27% say they would be open to seeing an adviser to seek a second opinion.

There is a lot of self-doubt, and it’s hardly any wonder.

Should amateurs meddle with money

Fund managers spend every waking moment anxious about whether they will be surprised by random events, which can be anything from a sudden drop in the share price of a company they’re backing to the hilt or a missile launch from North Korea.

Millions of things can go wrong.

For the five years to December 31, 2014, most managed funds did worse than the benchmarks they are designed to beat*:

• Only 22% of Australian equities funds beat the S&P/ASX200.
• Only 14% of international equities funds beat S&P’s developed world index.
• Only 15% of Australian bond funds beat the S&P/ASX Australian fixed interest index.

With results like that, what chance do DIY funds have? It’s no wonder they are looking for validation of their ideas and for a second opinion.

A lot is at risk. The self-managed super pool is worth $570 billion, or 29 per cent of all superannuation assets under management.

Bring the right buckets

Yes, managing a share portfolio is supremely difficult. But the primary elements of successful investing are very simple: decide on which asset classes to hold, and then divide up your capital between them.

Diversifying between investment buckets reduces risk from taking a concentrated approach, where savings can be sideswiped.

In a 2013 survey, US-based investment manager Vanguard found 91% of the returns for Australian managed funds which beat the benchmark can be attributed to their asset allocation policy.

So dividing funds thoughtfully among the right buckets is a good way to go. But how do you allocate money inside those buckets?

The case for ETFs

If it’s good strategy to diversify among asset types – cash, bonds, property, local and international shares – it is also prudent to diversify within them. The hard way to do this is to assemble a portfolio of, say, Australian shares and constantly monitor it; then research individual listed fixed income securities, if you want to hold an assortment of those; or pick a couple of fund managers who specialise in international equities; and so on and so on.

Far, far wider diversity can be achieved at far lower cost by using exchange-traded funds, where one trade can buy you the top 200 Australian companies, or the world’s 100 largest companies, or the US Nasdaq index. The menu of ETFs available on the ASX runs to about 120.

In its research, AMP found only 15% of its clients with self-managed funds use ETFs, and 20% said the only thing that’s holding them back is a lack of knowledge.

The evidence provided by the Standard & Poor’s survey is evidence enough that the average professional investor scores below average. Here are the numbers again:

For the five years to December 31, 2014:

• Only 22% of Australian equities funds beat the S&P/ASX200.
• Only 14% of international equities funds beat S&P’s developed world index.
• Only 15% of Australian bond funds beat the S&P/ASX Australian fixed interest index.

Trustees and members of self-managed super funds may be more empowered than they realise. With considered thought to allocations, and careful selection of ETFs, they might only have to go as far as the nearest mirror for a bit of validation.

*From the Standard & Poor’s Index Versus Active report, 2014.