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SMSFs handling rough markets better than APRA funds: Research
The self-managed superannuation fund (SMSF) sector underperformed Australian Prudential Regulatory Authority (APRA)-regulated funds in 2021 – a year characterised by economic and investment market expansion – but outperformed APRA funds during a contractionary 2020, a new report showed.
The SMSF sector headline return for the 2021 financial year was 14.8 per cent, compared with 16 per cent return for the APRA fund sector, the University of Adelaide International Centre for Financial Services (ICFS) said in its SMSF performance review, released Wednesday. The SMSF Association commissioned the report, the second by ICFS comparing APRA and SMSF sector returns.
In contrast, during the contractionary economic environment of 2019-20, which saw the COVID-19 pandemic accelerate worldwide toward the end of the fiscal year, the headline return for the SMSF sector was -0.6 per cent, compared with -1.2 per cent for the APRA fund sector (see chart).
“The results contribute to the existing body of evidence on the strong financial performance of the SMSF sector,” SMSF Association CEO Peter Burgess said. “What this report and the research released last year for the period 2017 to 2019 shows is that from an overall SMSF sector perspective, there is no systemic underperformance when compared to the APRA fund sector.”
The report looked at SMSF performance benchmarked to the APRA fund sector for the financial years ending 2020 and 2021, analysing the relationship between fund performance and fund size for SMSFs with more than $200,000 in net assets, as well as the performance of “funds that avoid excessively cash-concentrated asset allocations”, that is, SMSFs with less than 80 per cent of their net assets held in cash and cash equivalents.
“Our results show that overall financial performance of the SMSF sector remains robust, weathering the 2020 COVID-induced market storm relatively better than the APRA fund sector,” said University of Adelaide research professor Ralf Zurbruegg (pictured), who co-wrote the report. “Our analysis also continues to highlight how SMSFs benefit from professional advisory services, especially underscoring the value of trustee education on the benefits of diversified asset allocations and the importance of individuals selecting into SMSFs appropriately based on threshold superannuation balances of more than $200,000.”
Fund size and performance
The researchers found that, while larger SMSFs generally outperform, fund size “appears to have provided little to no protection from the downturn during this period”: SMSFs with more than $200,000 in net assets earned a median rate of return (ROR) of -0.7 per cent, only slightly higher than the overall SMSF cohort.
More predictably, they said, losses were worse for funds holding less than 80 per cent of their assets in cash, which saw an average ROR of -0.9 per cent.
However, “SMSFs meeting both conditions still had a slight edge over the typical APRA fund (-1 per cent versus 1.2 per cent median ROR),” the report stated. It also cited a “larger spread of SMSF performance outcome relative to APRA funds in all classes”, noting that the interquartile range – that is, the distance between the 25th and 75th percentiles in a statistical distribution – is consistently larger for SMSFs than for APRA funds.
“The research couldn’t be clearer – helping SMSF members understand the benefits of asset diversification, and the performance headwinds encountered by small funds (balances under $200,000), will improve the overall performance of the sector,” Burgess said.
To test whether the SMSF sector was more adversely impacted than other sectors by a larger proportion of SMSF members being in the pension phase and thus having a greater exposure to fund pension payments, the ICFS performance tables also provided a return for the sector that excluded SMSFs with one or more members in the pension phase excluded from the data sample. The results showed the sector performed markedly better in 2019/20 when investment markets were declining, whereas in 2020/21 when markets were performing strongly, the detrimental impact on performance was very small.
“The difference in performance in the performance of the SMSF sector when these funds were removed from the data sample could be traced, in the main, to pension-phase funds having a larger allocation to Australian equities,” Burgess noted.
“This explains why removing these funds from the sample in a bull market actually has a detrimental impact on the performance of the sector,” he added. “But there is no evidence the performance differential is due to pension-phase funds having a higher allocation to defensive assets, as the research found both pension- and accumulation-phase funds allocated remarkably similar proportions of their overall net assets to cash and term deposits.”
