DIY super performance check-up

DIY fund trustees should begin 2010 by giving their funds a full performance check-up. Be completely frank in your assessment.

First, check that your fund has been getting its share of the powerful rebound in share prices since last March.

Super funds with typically diversified portfolios should have gained substantially in value over the past 11 months – despite the recent 8.8% fall in the S&P/ASX200 from its high on January 11. Something could be fundamentally wrong with your fund’s investment strategies if it has missed out on this recovery.

And make sure your DIY fund’s medium- to long-term performance has been at least competitive with the big, non-DIY super funds.

But be warned. If you conclude that your DIY fund has been significantly under-performing, the smartest solution is not necessarily to close it in haste to retreat back to a large super fund.

Any decision to close a self-managed fund should depend on the particular circumstances. Think about the depth of the performance problems, the quality of the trustees, and the willingness of the trustees to gain top professional financial planning help if appropriate.

As well, make sure you know the size of any unrealised capital gains within your fund. The sale of growth assets of mainly shares and real estate to liquidate your fund before closure could trigger huge capital gains tax (CGT) liabilities – even though super funds are taxed at just 10% on capital gains, provided the investments are held for at least 12 months.

Yet no CGT would be payable on the sale of those same assets by your fund once those assets are backing the payment of a pension.

Here are six key points for your fund performance checkup:

1. Compare your fund’s performance against the super heavyweights
Generally, the median performance of the large, non-DIY funds should be your minimum benchmark.

Super fund researcher SuperRatings reports that the median return of the big funds with balanced portfolios was 12.88% in the 2009 calendar year. (These funds have a 60-76% of their portfolios in growth-style assets of mainly shares. The returns are after tax and investment management expenses.)

And these large balanced funds surveyed by SuperRatings produced an annualised five-year median return of 4.83%. While the five-year figure is hardly breathtaking, it is at least positive and ahead of inflation despite the devastation of the global financial crisis.

Obviously DIY funds with larger exposure to shares should have produced much higher returns in 2009. (The S&P/ASX300 Accumulation Index, which covers price gains and dividends, returned 37.6% to December.)

Call up the websites of one of the super fund researchers – see SuperRatings and SelectingSuper – and look at the median performance of the big funds with similar asset allocations to your DIY fund. Unfortunately, there are no performance tables that enable DIY funds to compare their recent performance against other DIY funds.

Another way to assess whether your fund’s returns is to compare its performance against the market indices in a way that reflects its particular exposure to the main investment sectors.

Certainly, 2009 was an extremely interesting time for investment returns but the medium- to long-term returns are those that really matter for super funds.

2. Ensure you know as much as possible about your fund’s performance
Do you really understand how your fund has performed over the past 12 months or so? The reality is that many trustees do not have any up-to-date information about their fund’s performance.

Phil La Greca, technical services manager of self-managed fund administrator Multiport, points out that DIY funds do not have to lodge their tax and regulatory returns for a financial year until May 15 of the following year – unless the funds have not lodged returns before. That’s a time lag of almost a year.

And La Greca suspects that the trustees of tens of thousands of Australia’s 420,000-plus DIY funds do not know how their funds have performed over the previous financial year until their tax and regulatory returns are completed by their professional advisers.

There is, however, a way for fund trustees to gain up-to-date performance information for their funds.

In order to track the changing value of the assets held by your fund, you will need some sort of system – whether it is a simple spreadsheet of your own creation, accounting software, an investment platform, or a premium administration service from a DIY fund administration group.

A strong argument in favour of using a premium administration service from a fund administrator such as Super Concepts or Multiport is clear. Trustees will gain access to a daily update of their funds’ value after allowing for fund income and expenses (including identifiable taxes).

As well, these services provide an up-to-date asset allocation of a fund’s portfolio – a crucial point in a fast-moving market. Of course, the value of assets as fund-owned real estate and artwork are only valued periodically.

If you know your fund’s latest asset allocation, you can check how its listed shares, bonds and cash, for instance, have performed against the various sector-specific indices such as the S&P/ASX200 Accumulation Index. (See point three of our performance check-up for the importance of knowing your fund’s asset allocation.)

3. Understand why your fund’s performance is lagging – if that’s the case
The most common cause of underperformance is that a fund’s portfolio has not been regularly rebalanced back closer to its intended strategic or long-term asset allocation – meaning the percentage exposures of its portfolio to the different asset classes of mainly local shares, overseas shares, bonds and cash.

A portfolio’s strategic asset allocation is widely believed to be responsible for more than 90% of its returns.

For instance, the plunge in share prices during the last bear market would have significantly reduced the typical DIY fund’s exposure to shares as a proportion of its overall assets. And if a fund didn’t promptly rebalance its portfolio back closer to its strategic asset allocation, it may have missed at least some of last year’s market rebound.

Graeme Colley, national technical director for ING Australia, says trustees of DIY funds should keep a close watch on how their funds’ asset allocations are moving. (Colley is vice-chairman of the Self-Managed Super Funds Professionals’ Association.)

4. Check that your funds’ costs are shaved to the minimum
One of the biggest handicaps to investment returns are the heavy costs that some DIY funds are carrying. Ensure that your fund is not paying unnecessarily high fees for investment management, investment advice and accountancy fees. And make sure your taxes are kept to a minimum.

A highly effective way to cut costs is to use a low-cost index share fund or exchange traded fund (market-traded index funds) to provide the core of your fund’s share portfolio. These funds keep capital gains tax down because transactions within the fund are much fewer than with a typical actively-managed share fund.

With index funds as the core of their share portfolios, more DIY funds are following a strategy of using a small number of actively-managed funds and/or directly-owned shares as “satellites” in an attempt to gain some above-market performance.

5. Satisfy yourself that performance is not being thrown away by poor stock picking and market timing
A way to sidestep most of the dangers of lousy stock-picking and futile attempts at market-timing is to use traditional index fund or exchange traded fund to provide the core of your fund’s share portfolio (see point four). And a determination never to overlook your fund’s intended long-term or strategic asset allocation provides a means to stay focused even when there is intense volatility in the market.

Even experienced professional investors rarely succeed in consistently timing the market – that is trying to pick the best times to buy or sell stock.

6. Question whether your fund needs professional help
Graeme Colley says that the better-performing DIY funds among the clients of Super Concepts’ administration services receive some degree of financial planning advice. If a fund has seriously underperformed, it is worth considering quality financial planning advice to try to get it back on track.