The size at which a self-managed superannuation fund (SMSF) becomes a viable alternative to regular funds may be considerably higher than the industry currently estimates due to the impact of scale on performance.
The industry typically advises that a minimum balance of between $100,000 and $200,000 is the tipping point at which SMSFs costs match those of pooled superannuation funds.
However, Rainmaker analysis of Australian Taxation Office (ATO) performance data suggests that there is a significant scale effect associated with fund returns which means the SMSFs don't receive a material benefit until they have much higher balances.
While overall SMSF returns are extremely competitive with APRA-regulated funds, the researcher found that SMSFs with less than $100,000 underperformed super fund benchmarks in every year from 2008-2012, the full period for which the ATO has data.
SMSFs with between $200,000 and $500,000 in assets also underperformed in four out of the five years, often by significant margins.
Funds with balances between $500,000 and $1 million still underperformed the All Super Fund benchmark in four of the five years for which the ATO has data, albeit by a much narrower margin. They lost 7.6% in 2008 versus 7% from the benchmark, returned 7% in 2010 compared to 9% from the benchmark and made 6.4% in 2011, versus 8.7% from the benchmark. In 2012, SMSF's in this range returned 0.2% while the super fund benchmark returned 0.5%.
Notably, funds with more than $1 million outperformed the benchmark more often than not and those with $2 million or more comfortably beat the wider aggregate in every year between 2008 and 2012.
The data suggests that funds with less than $1 million in assets under management are at a considerable performance disadvantage when compared to larger SMSFs and professionally managed super funds.
Rainmaker speculated that this could reflect how SMSFs below this threshold may be more focused on maximising tax benefits rather than running themselves to maximise investment outcomes.
They said claims that SMSFs systemically outperform simply because they are self-managed are consequently not supported by the evidence and are arguably misleading.
The ATO SMSF benchmarks are aggregate results compiled by the ATO from annual SMSF taxation returns. While these results are referred to as 'performance' they are actually defined by the ATO as 'return on equity' and so are likely to be gross return estimates that do not reflect the proper impact of fees and taxes. This means real returns could actually be lower.
"When there are more than half a million SMSFs there are inevitably going to be difficulties when you look at performance averages. The same is true of large superannuation funds" said SMSF Professionals' Association of Australia (SPAA) director of technical and professional standards Graeme Colley.
"In general, the ATO data tells us that SMSFs tend to have similar returns to APRA-regulated funds in up markets but don't lose as much in down years which helps dramatically from a sequencing risk point of view, especially nearing retirement."
He added that the ATO data also indicates that administration costs for SMSFs are also falling.
The other good news for the self-managed sector is that average fund balances now stand at $971,000 and the centre of gravity is shifting to the larger end.
In the nine years between 2003 and 2013, the proportion of SMSFs with more than $1 million in assets more than doubled from 12% to 28%and the proportion with more than $500,000 increased by two-thirds from 30% to 51%. The proportion with less than $100,000 more than halved from 26% to 12% and the proportion with $5 million or more quadrupled to 1.8%, a figure which represents almost 10,000 funds.
Self-managed super funds are superannuation's fastest growing segment with 520,000 funds holding $590 billion in funds under management as at June 2013. According to ATO data, an average 135 new SMSFs are established each day, or 17 per hour.
Eight out of 10 SMSF members are 45 years or more and 26% are over 65 years. Around a third of newly created SMSFs in 2012 were set up by people aged between 25 and 44 years.
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, ATO SMSF benchmarks
, All Super Fund benchmark
, April 7 issue
, ATO data
, Australian Taxation Office
, Financial Standard iPad app
, Graeme Colley
, June 2013
, SMSF Professionals