The move from Viridian and CFS to provide personal advice in a scaled manner highlights a growing willingness within the industry to fix its own problems in lieu of waiting for the government.
Private markets are worth around $14 trillion globally, ASIC believes. It’s not sure, and that uncertainty hints at the wider problem – private markets, and their effect on public ones, is still largely a mystery.
Does diversification really matter for your super fund?
Does diversification really matter for your super fund, and do you really need to hit the magical $500,000 level before your self-managed super fund (SMSF) can start generating any meaningful returns?
According to new research conducted by the SMSF Association, many of these myths have been debunked. With some 1.1 million trustees, and more than $800 billion in funds – representing about 25 per cent of the superannuation system – held in SMSFs, the Association speaks for a big chunk of super. As the peak body for SMSF professionals representing the sector, the Association’s mission is to lead the professionalism and sustainability of the sector. One way that it does this is through the collection of data, analytics, research and discussion of the issues that are relevant in the sector.
The SMSF Association commissioned a comprehensive research report, conducted by the University of Adelaide’s International Centre for Financial Services (ICFS). Titled, “Understanding self-managed super fund performance,” the report used data provided by BGL Corporate Solutions and Class Limited from more than 318,000 SMSFs, to better understand the investment performance of a typical SMSF, as the fund balance approaches $200,000, and compare it to that of an APRA-regulated fund and to the ATO’s calculation of SMSF returns.
George Mihaylov, a lecturer at the university’s Adelaide Business School, says: “One of the big misconceptions is ASIC’s statement that on average, SMSFs with balances below $500,000 have lower returns after expenses and tax than funds regulated by APRA. By using data gathered, we constructed a rate of return for these funds like APRA calculates. This allowed us to produce a model that could mimic APRA’s returns and also a typical SMSFs return.”
According to a statement released today, “The research data revealed no material differences in performance patterns for SMSFs (with balances) between $200,000 and $500,000, so the notion that smaller SMSFs in this range deliver materially lower investment returns, on average, than larger SMSFs in this range, is not supported by the research results.”
The variation in the investment performance of a typical SMSF boiled down to the way the ATO calculated returns compared to the method APRA was using. It’s to do with the way data is collected, and there are also differences in the methodology of calculating returns.
“Nonetheless, the way the University overcame these hurdles showed that SMSF returns displayed greater variation and in-fact have a higher propensity to outperform APRA funds,” says Mihaylov. “The takeaway message is to identify funds that aren’t doing as well as you’d like and to then develop strategies to find out why they are underperforming. Perhaps this would aid professionals such as financial advisers who support these funds to produce better returns.”
The study also looked at asset allocation as a determining factor. “Anytime a fund was ignoring a particular asset class, they produced the lowest returns amongst the other funds,” says Mihaylov. “If they were not investing in international equities or not in domestic equities, there would be a variance.”
So it raises the question – Do funds that are diversified perform better?
According to Mihaylov and the research conducted, they do. “Of course, that is in fact the case. Funds in one or two assets generally underperform funds that are in four or five asset classes. That creates an opportunity there for advisers and planners to add value using this theory.”
What about the arbitrary level of $500,000 as the minimum for viability? Mihaylov says that theory is nonsense. “If I look at it through an academic lens, there’s no way it’s right. We broke down the population into various different size classes, from $10,000 to $150,000 increments. Basically, we were able to show there is nothing that proves that smaller SMSFs do worse than those above $500,000. The numbers show that a threshold should be set lower than $500k.
“I personally found it quite remarkable that our research similarly points to the same level of minimum find efficacy; $200,000 sounds arbitrary, but given the analyses, it’s a very appropriate benchmark for fund size,” Mihaylov concludes.
APRA uses financial statements and the ATO uses financial returns to calculate their returns. As a result, Mihaylov says it “limits them on what they can forecast and analyse.” When comparable data inputs and calculation methodologies are used, the median investment performance of SMSFs, particularly those with balances of $200,000 or more and which are not heavily invested in cash, was “very competitive with APRA-regulated funds” during the period in question.
