Create the best portfolio for your DIY fund

The lure of tax-free retirement benefits in the new superannuation regime makes setting up an efficient portfolio for you DIY fund more imperative than ever. By MICHAEL LAURENCE.

By Michael Laurence

How to create an investment portfolio from scratch for their new self-managed super fund must be a question preoccupying the minds of many investors.

The conundrum of establishing a really effective portfolio must be especially pressing for the thousands who established self-managed super funds in recent months in the lead up to the introduction of the new super regime from July with its headline feature of tax-free retirement benefits.

Consider a few stats. An estimated 40,000 self-managed funds were established in 2006/07, a record annual figure. About 7200 new funds were established in May alone – more than three times the usual number for that month.

Many new trustee-members of their own funds must be looking at the piles of cash in their funds’ cash management trusts and perhaps thinking that the easy part was to get the money into a fund – investing it in a smart way could be the tough part.

Here are four tips, compiled with guidance of financial planning and superannuation professionals, to help get your fund off to a solid start:

ONE. Don’t let cash dominate your portfolio

Sydney financial planner, actuary and superannuation specialist Graham Horrocks urges his clients to think about how long the money has to last – it could be for 30 years. Recent life-expectancy tables show that with couples aged 65, there is a 50% chance that one spouse will live to 90.

As Horrocks says, a portfolio created for the long-haul should have enough growth investments of shares and property to increase in value to at least offset inflation – after paying the annual costs of investment and fund administration.

The classic diversified portfolio holds about 70% growth assets and the remaining 30% in fixed interest and cash. The proportion of growth assets is adjusted up or down in line with the personal tolerance to risk and expectations for returns of the investors.

Graeme Colley, superannuation strategy manager for self-managed fund administrator Super Concepts, says only a handful of the 3000 funds administered by his group have all-cash portfolios, and these are in the pension-paying phase.

The average portfolio administered by Super Concepts includes about 48% in direct shares, 23% in managed investment funds (which would include share funds), and a little over 16% in cash and bonds.

TWO. Think about smart ways to gain a diversified portfolio

A simple way to gain a diversified investment portfolio is to simply put all of the money in your self-managed fund into a diversified or balanced managed fund. But there are a few points to be careful about in this regard.

First, investors who simply put all of the money into a diversified investment fund perhaps might question why they have established a self-managed fund in the first place – why not simply join a large fund and leave the money in its standard or default portfolio.

Perhaps the greatest attraction of having a self-managed fund is being able to tailor the portfolio to exactly your requirements and, in many cases, being able to hold assets such as direct property, if required, or unlisted investments that cannot be held in large funds.

And those who establish a self-managed fund and put much of the money into managed funds have to think carefully about costs. You will pay $1500 (at least) to $2000 or more a year for the annual professional administration of a self-managed fund – the cost depends mainly on the volume of annual investment transactions, not on the value of assets in your fund. Members should try to avoid paying high funds management costs on top of annual fund administration fees.

Horrocks puts forward a straightforward strategy for a possibly cost-effective diversification. (This is not a recommended portfolio, which should depend much on your personal circumstances and on whatever advice is received from a licensed adviser.) New member-trustees of self-managed funds might invest:

• 50% of the value of the self-managed fund in one or more quality balanced or growth managed investment funds with diversified portfolios. Horrocks suggests wholesale funds – the minimum investment accepted by a wholesale fund is typically $100,000 – in order to minimise costs. Expect annual investment management fees of about 1% of the amount invested.

• 5% of the fund’s value in a cash management trust.
• 25% of the fund in direct Australian shares. A simple, low-cost way to gain exposure to large share portfolios is through one of the listed investment companies such as Australian Foundation or Argo. Australian Foundation, for instance, has holdings in about 100 companies and follows a mainly buy-and-hold investment policy that minimises CGT. Your direct share portfolio might include your own stock selection – take a look at the share packages, put together by such brokers as Commsec, that comprises different selections of stocks for investors with various objections.

• 10% of the fund in property. This section of your portfolio might included listed property trusts – be warned, these are going through a difficult time at this stage – or what are known as exchange traded funds that replicate the performance of a specific index such as the S&P/ASX 200 index of listed property trusts.

• 10% of the fund in international shares. “This will probably be through a managed wholesale fund,” Horrocks says.

THREE. Drip-feed your investments into the market

This means don’t invest all of your money at once but progressively over, say, a year, suggests Horrocks. If you had a $1 million portfolio, you might invest $250,000 each quarter. “This means you average your way into the markets and don’t face a market-timing risk,” he says. In this way, you should avoid being hit by a sudden fall or rise in prices over a short period.

FOUR. Consider professional investment advice

Graeme Colley of Super Concepts says most of the best performing funds being looked after by his group receive professional investment advice. The possible structure of the portfolio put forward by Graham Horrocks could be discussed with your adviser.

For more hints and tips on making the most of superannuation, see our Growth Resources, Wealth/Super section.