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.

Key Points

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

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.

The wealth destruction was felt most keenly by those that got out at the bottom and put their remaining capital in cash. Unfortunately, a lot of people did just that. Then, they set up self-managed superannuation funds and found themselves struggling to make sense of the investment market.

These conclusions are drawn from an AMP survey of 1,000 of its SMSF investor clients. Nearly half set up their DIY funds after 2009, and 53% said they did so because they wanted better control.

The trouble is that they lack confidence in their own decision making. About 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.

These results suggest a lot of self-doubt among SMSF investors, and it’s hardly any wonder.

Should amateurs mange their own money?

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?

No wonder they are looking for validation of their ideas. With the self-managed super pool worth $570 billion, or 29% of all superannuation assets under management, a lot of money is at risk and most investors, including the professional, aren’t getting the performance they hoped for.

Managing a share portfolio is difficult. But the primary elements of successful investing are quite simple: decide on which asset classes to hold, and then appropriately divide your capital between them.

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

For proof, consider a 2013 survey by US-based investment manager Vanguard, which found that 91% of the returns for Australian managed funds that beat the benchmark could be attributed to their asset allocation policy.

So dividing funds thoughtfully among the right asset classes is a good way to go. But how do you allocate funds between cash, bonds, property and local and international shares?

The case for ETFs

The difficult, expensive way is to assemble a portfolio of, say, Australian shares and constantly monitor it. The same goes for individual listed fixed income securities and fund managers that, for example, specialise in international equities.

This requires time, effort and constant attention. Better 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 suggests the average professional investor scores below average. 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.

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