How is your DIY fund really performing?

The true performance of self-managed super funds can be a mystery, even for the members. Here are six strategies to help breakthrough the information barrier.

The harsh reality is that many members of self-managed funds would have only a rough idea about how their funds are performing in this savage bear market and, perhaps, even over the longer term.

In particular, relatively few members of self-managed funds would have a grasp of how their fund’s performance measures up against other self-managed super funds.

Yet Graeme Colley, chairman of the Self-Managed Super Funds Professionals’ Association of Australia (SPAA), says that it is the trustees’ duty to know how their funds are performing. And, of course, it is in your best interests as both a trustee and a member to know your fund’s returns. (Under superannuation law, all members of self-managed funds must be either trustees of the fund or a director of its trustee company.)

Unlike with the big super funds, there are no performance league tables to enable an individual self-managed fund to compare its performance with the average returns of other self-managed funds.

It is understood that the tax office – regulator of Australia’s 400,000-plus self-managed funds – is looking into producing some performance figures of the funds under its regulation.

The SPAA has commissioned the University of South Australia to undertake a major study to calculate the average self-managed fund returns and asset allocations, among other things, using figures provided by accountancy and fund administration firms. It will begin as a pilot study.

SPAA intends that returns – from a random selection of initially 15,000 funds, increasing to 200,000 funds – will eventually provide returns from 2002-03 to 2011-12. And the study is likely to be extended beyond those years, says SPAA chief executive Andrea Slattery.

But, of course, the university will take some time to gather enough information for funds to measure their performance over the medium and longer terms.

Graeme Colley says self-managed funds that use an investment platform to hold all of their investments can check their pre-tax returns on a nightly basis.

And fund administrators and accountants prepare annual figures showing how an individual fund has performed against the previous financial year. But these, of course, do not provide a comparison with other DIY funds.

A crucial consideration is that trustees/members of self-managed funds do not necessarily have a target of high performance foremost in their minds.

Colley says that based on anecdotal information, he is led to believe that most people establish self-managed funds with the intention of gaining more control over their retirement savings, increasing investment flexibility, and reducing costs. A motive to achieve higher investment returns than would be achieved in a large super fund seems to be further down their list of priorities, he says.

The tax office already provides a useful insight into the state of DIY funds with its quarterly self-managed fund statistical report.

This report includes such information as approximate asset allocations between investment sectors for different size funds, in-flow and out-flows of money, age and income of members, total fund assets, and total members. However, performance figures are not given in this report. (The latest statistical report was released last week.)

Here are six strategies that trustees/members can follow in an attempt to get at least an idea of how their funds are performing:

Measure your fund’s annual performance against big funds

As Colley says, this makes much sense because if you weren’t in a self-managed fund you’d be in a large one.  This information is easy to find on the websites of the super fund researchers SuperRatings and SelectingSuper.

Look closely at the median and first quartile returns of the big funds that nearest reflect the diversification of assets in your DIY fund. But see the next point below.

Compare like with like

Ensure the big fund category that you are comparing your fund against broadly has a similar asset allocation between growth and defensive investments. In any case, this is usually a very inexact exercise, because you won’t find a large fund or a large fund category with an identical asset allocation to your own self-managed fund.

But make sure, for instance, that you are not comparing the performance of funds with, say, a conservative asset allocation if your fund has the classic diversification of 70% in growth assets (mainly listed shares and property) with the remainder in defensive assets (mainly bonds and cash).

Check returns against market indices

Another approach is to examine the returns of your fund against fund and market indices.

Philip La Greca, technical services director of self-managed fund administrator Multiport, says his firm, for instance, provides each of the 1200 funds under its administration with performance figures showing how the fund has performed against selected market indices.

The indices used by Multiport include the various mean returns for large funds on the database of fund researcher Morningstar, in its defensive, moderate, balanced, growth and aggressive categories, and various sector-specific indices such as the S&P/ASX200 Accumulation Index.

La Greca says self-managed funds using the Multiport administration service are supplied with their pre-tax returns, as well as after-tax returns, to allow accurate comparisons with the market indices. And Multiport also measures how each of its client funds are performing against the CPI. Significantly, the firm provides each fund with a record of its rolling returns over the longer term.

Speak to your fund administrator

Your fund’s administrator may be willing to give you an impression of whether your fund’s performance is below average for other funds receiving its administration services. But keep in mind that the administrator would have funds with a wide range of asset allocations for members of different ages and with different tolerances to risk.

Ask your adviser to undertake a performance review

If you do receive professional financial planning/investment advice for your fund, ensure that the advice includes regular performance assessments of your self-managed fund. Of course, fund trustees should undertake this review themselves if not receiving professional advice.

Understand the reasons for bad returns

La Greca says that if your fund is not performing up to your selected indices or other selected benchmarks, you should try to understand why. Underperformance has to have a reason,” he says.

“You may need to take remedial action or maybe you shouldn’t be in self-managed funds,” La Greca adds, pointing out that he believes that perhaps a quarter of self-managed fund members would be better served in large funds.