New research backs diversified SMSF portfolios

New research conducted by the SMSF Association and the University of Adelaide confirms self-managed super funds (SMSFs) that have diversified investment portfolios outperform those that do not.

The research , based on financial statement data from over 318,000 SMSFs for the period 2017 to 2019, aimed to assess the investment performance of SMSFs against larger superannuation funds.

The sample represents more than 50% of all SMSFs.

Across the three financial years and examining seven asset classes (cash and term deposits, listed Australian equities, listed international equities, listed trusts, unlisted trusts, Limited Recourse Borrowing Arrangements (LRBAs) and other assets) the research revealed the least diversified SMSFs (those holding a single asset class) recorded the lowest performance.

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It also found SMSFs were competitive after fund balances reached $200,000, but the importance of portfolio diversification also emerged as a significant part of the findings.

"The benefits of adding a second, third, or fourth asset class are strong," SMSF Association chief executive John Maroney said.

"Each increase of an additional asset class (up to four) appears to be associated with an improvement in the median rate of return (ROR) of between 1% and 3%."

Diversification beyond four asset classes (up to seven) also appeared to correlate with improved performance, albiet at reduced marginal rates.

The research also delves deeper by seeing how SMSF performance varies with degrees of concentration within individual asset classes, with some interesting results.

According to the research, those SMSFs that allocate a greater proportion of their assets to cash and term deposits also saw significant underperformance.

However, typical fund performance does not appear to maximise for those that minimise their allocations to these assets.

Instead, the highest median fund performance at slightly above an 8% ROR, are for those that allocate 10-20% of their net assets to cash and term deposits.

"This result suggests that funds have an opportunity to optimise their asset allocations regarding cash deposits, but also emphasises that funds with cash holdings concentrated above 20% of net assets are associated with significant underperformance," Maroney said.