Are SMSF investors too conservative?

The view that self-managed superannuation funds with less than $1 million in assets are likely to underperform APRA-regulated funds says more about SMSF asset allocation then it does for where individual members fit inside Australia's $2.6 trillion super system.

Rainmaker Information analysis of APRA, ATO and SMSF Association data suggests, on average, lower investment outcomes for smaller SMSFs can be better explained by conservative asset allocation rather than whether a member is in accumulation or pension phase.

The latest Rainmaker Advantage report said ATO data for SMSF asset profiles found large SMSFs have growth asset weights (GAW) which average 64%. These reduce to 32% for smaller SMSFs.

"Moreover, in 2016 (the most recent year for which ATO performance data is available) these GAW ratios were 94% correlated with the SMSF fund size category performance over three and five years," the report said.

The research house goes on to say that market commentators and investment managers assessing SMSF performance should recognise that SMSFs between $200,000 and $500,000 are akin to capital stable investors.

"SMSFs between $500,000 and $1 million are akin to balanced investors and SMSFs above these amounts are akin to balanced-growth investors," the report said.

The Productivity Commission recently reported that SMSFs have broadly tracked the long-term investment performance of APRA-regulated funds, on average. However, smaller SMSFs have delivered materially lower returns on average than larger SMSFs.

The SMSF Association argues the Productivity Commission's calculations are somewhat askew. This because a high proportion of SMSFs - both by member accounts and funds under management - are in the pension phase, something not seen in the APRA-regulated industry and retail super fund sectors.

"Members in retirement phase generally look for more stable income, meaning that they will forgo higher investment returns for reduced volatility and risk," the Association said.

"These preferences lead to members in retirement phase having more liquid and less risky asset allocations and lower investment returns. We understand that the Commission did consider addressing this issue through creating a separate investment return benchmark for SMSFs but this was not pursued in the draft report."

However Rainmaker Information analysis shows that retirement products for industry and retail super funds, due to the concessional tax treatment relative to accumulation pre-retirement products, "outperform pre-retirement products over three and five years by 12% across all the diversified asset classes."

"This analysis confirms that SMSF investors as a group, even those in preretirement accumulation phase, are surprisingly conservative," the research house concludes.

Rainmaker Group owns Financial Standard. 

Read more: APRAATOProductivity CommissionSMSF AssociationAustraliaRainmaker InformationFinancial StandardRainmaker Group
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