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SMSF returns show they go the extra investment mile for retirees
For the estimated 440,000 retirees who opt to manage their own investment savings via a self-managed super fund (SMSF), a recent research report showing their funds, on average, outperformed the APRA-regulated funds over the five years to June 30, 2023, must have been as welcomed as the flowers in May.
In a volatile investment period that included a global pandemic, the latter half of the first Trump presidency, the bitter Russian-Ukrainian conflict, a surging oil price, higher inflation and tighter monetary policy, research by the University of Adelaide’s International Centre for Financial Services (ICFS) shows SMSFs, on average, outperformed the APRA funds by 1.2 percentage points over these five years.
The five-year annualised rate of return (ROR) on SMSFs between July 1, 2018, and July 30, 2023, was 6.5 per cent compared with 5.3 per cent for the APRA funds over the same period.
While the median ROR for SMSFs lagged their APRA counterparts in 2022-23 by 1.8 percentage points – 6.6 per cent compared with 8.4 per cent – the research shows they clearly outperformed over the longer timeframe.
This research project, first commissioned by the SMSF Association in 2021, has become the bellwether for the sector, with the most recent report based on data from 421,000 SMSFs (69 per cent of all SMSFs) provided by BGL Corporate Solutions, Class and SuperMate.
ICFS project team lead George Mihaylov said APRA funds outperformed the SMSF sector in 2022-23, continuing the interchanging pattern where APRA funds outperform in some years while the SMSF sector outperforms in others.
“However, when aggregated over the five years to June 30, 2023, the SMSF sector has outperformed APRA funds by about 1.2 per cent on an annualised basis,” he said.
The research strongly suggested the underperformance of SMSFs in 2022-23 compared with APRA funds was the former’s underweight position in international equities.
“This is in sharp contrast with APRA funds that have a much larger proportion of their investments diversified overseas, typically with larger weights,” Mihaylov said.
“While this home bias generally leads to sub-optimal levels of investment diversification, it can also act to dampen earnings and returns during periods where the domestic stock market underperforms international markets – precisely what happened in 2022-23 relative to some international markets,” Mihaylov said.
It reflects a traditional SMSF bias towards four asset classes – managed funds (listed and unlisted), Australian equities, property (retail and commercial) and cash and term deposits. That old phrase, “better the devil you know”, has been their mantra.
But this is changing – rapidly. ATO figures to June 30, 2024, show that the listed trust category stood at $62.8 billion or 6.6 per cent of the $957 billion held in SMSFs, of which a sizeable percentage are ETFs – the fastest-growing SMSF asset class after listed Australian equities – with the prime reason being they have become the investment tool of choice for those SMSFs wanting diversification via overseas markets.
As the 2024 Class Annual Benchmark Report highlights, of the top 10 ETFs held by SMSFs, eight have an international focus. Just as importantly, nearly a third of the 181,862 SMSFs that provided the data for this comprehensive benchmark report held an ETF.
As the report says, “although ETFs account for just 5.4 per cent, or $17.7 billion, of Class SMSF assets, they represent the fastest-growing category aside from direct Australian shares, with allocations increasing by 0.7 per cent, or an estimated $7.2 billion, over the 2024 financial year – a healthy 15.4 per cent increase year-on-year”.
At the recent SMSF Association national conference, chief executive officer Peter Burgess (pictured) told the gathering of SMSF specialists that their super sector was in “rude health”. Aside from the impressive investment performance, other positives were the number of funds increasing (and the number of wind-ups decreasing), improving technology and funds under management exceeding $1 trillion.
What he didn’t say was that the APRA funds are finding it increasingly difficult to service their members once they are in retirement.
Managing members in retirement has always been bread-and-butter for SMSF advisers – the personalised service they offer compared with the APRA funds is a major point of difference. The five-year performance numbers just make SMSFs all that more appealing.
