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This commentary is written by Vanguard Principal, Corporate Affairs & Market Development Robin Bowerman. The title is SMSFs winning on cost control

It was first published on Friday 20 April 2012

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

When it comes to fashionable trends in superannuation it is hard to go past self-managed super funds (SMSF).

For the five years up to the end of June 2011 SMSFs have been the fastest growing sector of the super industry.  That is one of the results out of the latest statistical overview of the SMSF sector published by the Australian Tax Office (ATO) earlier this month.

Over that five year period new funds were set up at an average rate of 2500 per month.  At the end of June 2011 there were 456,000 SMSFs and they accounted for about $418 billion of the money invested in the total super market.

Interestingly the new fund start ups suggest that younger people aged below 35 are turning to SMSFs at an increasing rate for their retirement savings. In the June 2011 quarter more than 11 per cent of the new funds were established by people aged under 35 compared to just under 5 per cent of the whole SMSF trustee population being in that age group.

The very nature of the SMSF sector – most funds having just two members –makes it challenging to analyse but the ATO data helps paint a picture of the broader trends and changes within the sector based on the data provided by funds on their tax returns.

What is clear when you look at the asset allocation of SMSF portfolios, as reported to the tax office, is that this sector is heavily weighted to two major asset categories - listed shares and cash and term deposits.

Those two buckets – shares and short-term cash - account for about 60 per cent of total SMSF assets and that raises questions around diversification and risk management within portfolios when contrasted with larger institutional super funds.

It may well be that the ATO data, being based on tax return classifications, is not painting a clear picture of the real investment asset allocation. For example unlisted trusts accounted for 9 per cent of the assets but that category is likely to include international share or fixed income funds that would help allay some concerns on the diversification front.

SMSF advisers may well point to positive performance returns in recent years when compared to the larger institutional super funds to argue there is little to be concerned about.

The heavy weighting to cash/term deposits certainly helped SMSF portfolios weather the global financial crisis but there is no guarantee that term deposit rates will remain attractive 5, 10 or 20 years from now. And that is the long-term horizon for more than 55 per cent of SMSF trustees who are aged between 45 and 64.

Control is the common reason for people wanting to set up their own super fund. However, the challenge for individual funds in accessing some institutional markets like government and corporate bonds means that trustees have practically speaking had limited ways to diversify their  cash/fixed income portfolio. That may change now fixed income ETFs are becoming available.

An interesting exercise for people running their own SMSF fund is to be able to benchmark their fund to see how they are doing compared to a relevant peer group – and that is not just on performance. 

Trustees of large super funds can testify to an unhealthy focus on short-term performance. Risk control and costs are two other key measures of any successful super fund.

And on that score the ATO data is saying that SMSF trustees are doing well in reducing fees as assets rise. Almost 50 per cent of SMSFs have operating expenses between 0.25 per cent and 0.50 per cent, according to the ATO report.

So if you accept the simple premise that while no-one can predict what the future holds in terms of investment performance you can focus on what is within your control – and that is keeping costs as low as possible.

Because regardless of whether you have your own SMSF or are a member in a large fund the more you pay the less you get.

And that concludes the column

SMSFs winning on cost control

from Robin Bowerman,  Principal, Corporate Affairs & Market Development at index fund manager Vanguard Investments Australia

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Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.