The SMSF sector, which has traditionally shied from growth assets, underperformed default MySuper investment strategies by 1.2 percentage points in the 12 months to April 2018.
The average SMSF returned 6.6% before fees and tax, while the average default MySuper product hit 7.8%, according to SuperGuard360 SMSF performance indices released yesterday.
The SMSF sector's lax performance stems from its reluctance to put their money in growth assets, according to SuperGuard360.
As an example, international equities returned six percentage points higher than Australian equities over the 12 month period - an opportunity that many SMSFs missed out on.
Implications for smaller SMSFs
Nearly three out of four SMSFs have assets under $1 million and these funds, according to the ATO, tend to have more money parked in cash and less in equities when compared to higher-performing SMSFs.
"This means that the majority of SMSF members are in funds likely to achieve lower than ideal investment outcomes. To ensure their retirement savings last as long as they do, SMSF members should review the amount they pay in fees and benchmark their portfolio to ensure it is achieving the returns they are expecting. If they are achieving lower investment returns than the benchmark it is important they understand why," the SG360 report said.
SMSF vs MySuper, longer term
If you had $100,000 to invest 10 years ago, an SMSF would have turned it into $156,951. This is compared to a default MySuper product which would have resulted in $162, 504.
SMSFs have historically returned lower than default MySuper products but the performance gap has widened in the last year. SMSFs underperformed default MySuper products by 1.2% over the year; 0.3% over three years; 0.8% over five years; 0.4% over 10 years.
The SG360 SMSF reference index describes the post-fee investment return a SMSF trustee would receive if they invested passively using the asset allocation represented by SMSF asset distribution published by the ATO.
The SG360 default index demonstrates the post-fee post-tax investment return a SMSF investor would have achieved if they invested in the same way the typical Australian Prudential Regulation Authority (APRA) regulated MySuper product invests.
How do SMSFs diversify right now?
Australia had 593,000 SMSFs as of December 2017 - a 2% gain over the previous year.
Vanguard and Investment Trends interviewed 1096 SMSFs, in a report released yesterday with respondents self-reporting that they had 36% in direct shares, 23% in cash and cash products, 22% in managed investments, 12% in direct property and 4% in other investments.
The study showed 82% agreed diversifying their SMSF is important but "in practice many don't achieve it."
The cohort that thought their SMSF was very well diversified had 29% in direct shares, 28% in managed investments, 21% in cash and cash products, 12% in direct property, 28% in managed investments, 7% in other investments and 3% in hybrid securities.
"The established shift towards managed investments has continued largely at the expense of direct shares," the report said.
The amount of cash held by SMSFs has declined for the first time since 2009, coming down to $174 billion in 2018 down from $184 billion the previous year. Yet respondents reported a 21% cash allocation as well-diversified.
"In the year ahead, there are a growing proportion of SMSFs looking to invest in international direct shares and ETFs," the report said.