The investment performance of a typical self-managed super fund (SMSF) improves as the fund balance approaches $200,000. Once this threshold is reached the fund achieves comparable investment returns with APRA regulated funds, according to comprehensive research released today by the University of Adelaide’s International Centre for Financial Services (ICFS).
In its report, titled “Understanding self-managed super fund performance” the University used data provided by BGL Corporate Solutions and Class Limited from over 318,000 SMSFs between 1 July 2016 and 30 June 2019, to identify the minimum amount of capital required for an SMSF to achieve comparable investment returns with much larger funds.
When coupled with research by the actuarial firm Rice Warner in late 2020, which found SMSFs with balances of $200,000 or more were cost effective compared with industry and retail superannuation funds, it mounts a compelling argument for the competitiveness of SMSFs with balances of $200,000 or more compared with larger funds.
The SMSF Association, which commissioned the report, says the research supports the regulatory focus on fund size, but it also suggests that current regulatory guidance around minimum SMSF balances is poorly calibrated.
In their guidance to licensees and advisers on the disclosure of SMSF costs (INFO 206), ASIC states that “on average, SMSFs with balances below $500,000 have lower returns after expenses and tax than funds regulated by APRA”.
Association CEO John Maroney says: “The research data revealed no material differences in performance patterns for SMSFs between $200,000 and $500,000, so the notion that smaller SMSFs in this range deliver materially lower investment returns, on average, than larger SMSFs in this range, is not supported by the research results.”
“The research results suggest a more appropriate threshold is $200,000”, Maroney says.
The research also found that, when compared to the rate of return (ROR) performance measure used by APRA to calculate investment returns for APRA regulated superannuation funds, the ATO’s calculation of SMSF returns produces lower estimates of investment returns all else being equal.
“Most of the differences arise because the ATO’s calculation is based on data derived from SMSF annual returns whereas APRA uses information from superannuation fund financial statements”.
“The research study overcomes this by using SMSF financial statement data to calculate an annual ROR for each fund in the data sample”, says Maroney.
When comparable data inputs and calculation methodologies are used, the median investment performance of SMSFs, particularly those with balances of $200,000 or more and which are not heavily invested in cash, was very competitive with APRA regulated funds during the period in question.
“This is a very significant development for the SMSF sector – not only does this research cast new light on the performance of SMSFs compared with APRA regulated funds, but it also illustrates why the ATO’s published SMSF investment returns should not be used to compare the performance of the SMSF sector with other sectors”, Maroney says.
Commenting on the research, Professor Ralf Zurbruegg from the University of Adelaide says the way in which the ATO calculates SMSF performance is different to how APRA calculates performance of APRA regulated funds.
“When we account for the differences in how the performance of these funds is calculated, neither APRA regulated superannuation funds nor SMSFs with balances above $200,000 consistently under or out-perform each other”, Zurbruegg says.
The research also found SMSFs generate greater variation in fund-level performance relative to APRA regulated superannuation funds which the SMSF Association says highlights the role of professional advice and a sound investment strategy.
Maroney says: “The greater variation in fund-level performance, and a higher tendency to outperform relative to APRA-regulated funds, presents opportunities for advisers to add value and deliver higher rates of return for suitable superannuation investors.
“It also presents opportunities for advisers to assist those SMSF investors who have a higher tendency to underperform”.
Consistent with standard finance theory, the research shows on aggregate, SMSFs with more diversified asset allocations achieve higher returns.
Zurbruegg says: “The performance benefits of adding a second, third or fourth asset class are strong and consistent across the 2017-19 period.
“The results provide a useful reference point and education tool for SMSF professionals and investors and supports the regulatory focus on SMSFs with inadequate levels of diversification.”
The report notes that the sample made available for the research study was a significant point of strength and differentiation. Overall, the study observed the financial performance of more than 318,000 SMSFs (representing over 50% of the entire SMSF population) and almost 500,000 unique performance observations.