Most self-managed superannuation fund owners would have made more money investing in industry super funds in the seven years to 2015, according to a new report from the University of Adelaide’s International Centre for Financial Services.
Analysis by The New Daily based on figures produced for the review, which looked at SMSF’s in four bands of value from under $200,000 to over $1 million, found that over the seven years to June 2015 only the largest of SMSFs outperformed pooled funds.
The top performing SMSF category, those with over $1 million in their fund, averaged 6.8 per cent returns in the seven years to 2015 while the next best performer, industry funds, averaged 6.2 per cent and retail funds 3.4 per cent.
Small SMSFs with less than $200,000 invested on average lost 5.2 per cent a year over the seven years, something their owners would not have been happy with.
The two mid-tier levels of SMSFs both outperformed retail funds, which scored 3.4 per cent but came in behind industry funds, which racked up an annual return average of 6.4 per cent over the seven years. The average for all SMSF’s in the survey was 3.7 per cent over seven years.
The performance outcomes reflect the makeup of different fund types. Retail funds with their high equity ratings outperform in years where the share market is strong and underperform, sometimes dramatically, when equities slump.
The hare and the tortoise
Industry funds, with their larger exposure to direct property, infrastructure and private equity, are steadier performers than retail funds, enabling them to perform better over time. Larger SMSF’s were less volatile than retail funds, probably reflecting their higher propensity to invest in property.
The costs of running SMSF’s hit hard at the performance of smaller funds. Expenses for the smallest funds were as high as 6.8 per cent of fund value while for the largest they were as little as 0.6 per cent and averaged 0.9 per cent. These expenses include accountancy, legal costs and investment advice.
Figures for pooled funds provided by SuperRatings show that Fee Quartiles for pooled funds range from 0.76 per cent to 1.26 per cent for funds over $500,000 and 0.9 per cent and 1.5 per cent for $50,000 funds. Industry funds tend to be at the lower of these ranges with retail funds at the upper end although for-profit My Super funds are also at the lower range.
You need big bucks for an SMSF
David Simon, principal of advisory house Integral Private Wealth, told The New Daily that while it was arguable that SMSF’s could be viable with balances of $250,000 “they’d generally need to be between $400,000 and $500,000 to be properly diversified and make use of the extra investment choice that SMSFs offer.”
Industry and retail funds increasingly offer members the capacity to invest in individual stocks, term deposits and sector specific funds so “the attractiveness bar that SMSF’s have to get over is higher than before,” Mr Simon said.
Professor Ralf Zurbrugg of the University of Adelaide, an author of the report, said while benefits of size for SMSFs faded quickly once balances reached $500,000. “Above that level performance [resulting from lower running costs] saw only marginal improvement,” he said.
Mr Simon said SMSF’s with smaller balances could be viable to “fill particular trustee needs. For example where a small business person may want to put a part of their work building into their super fund so they pay rent to their fund not a landlord”.
The latest superannuation statistics published by the Australian Prudential Regulation Authority this week show that super balances have grown slightly to $2.1 trillion with SMSF’s accounting for 29.5 per cent of assets.
However SMSF’s remain a bastion of super privilege with their 1 million members having average balances of $572,000 while the 11.1 million industry super fund members have average balances of $39,000. The 12 million retail fund members have average balances of $42,000 while 3.5 million public sector fund members have average balances of $150,000.
The New Daily is owned by industry super funds