The latest market research from Vanguard Investments has revealed while SMSF portfolios in the main have outperformed their retail fund counterparts, they have taken on substantially more risk in doing so.
In order to uncover the level of investment risk relating to equities contained within SMSFs, Vanguard constructed 1000 portfolios made up of S&P/ASX 300 stocks, 1000 portfolios consisting of only large-cap stocks, and 1000 portfolios with a high-yield tilt.
“SMSFs outperformed the broadly diversified funds pretty significantly in regard to 2008. They obviously got whacked around with the market as everyone else did and when you get to the end of 2013 they still outperformed, but not dramatically,” Vanguard head of market strategy and communications Robin Bowerman said at the CPA SMSF Conference and Expo in Sydney last week.
However, analysis of the risk levels in SMSFs via its research portfolios produced some significant results when compared against Vanguard’s existing diversified managed funds.
“The risk in periods of relative volatility in the marketplace as we headed into the GFC (global financial crisis) was pretty low. But the risk factor here [during and after the GFC] is what got our attention because it’s almost double the risk in our diversified funds,” Bowerman said in reference to the results from the 1000 portfolios drawn from the S&P/ASX 300.
Bowerman pointed out the risk profiles of the other two groups of 1000 representative SMSF portfolios produced almost exactly the same result.
He cited stock selection as one of the main factors in driving the level of risk, with the bias towards domestically listed equities a major contributing factor.
A larger allocation to international shares would help address the situation, but the most important issue was whether or not SMSF trustees were aware of the risk they were taking on, he said.
“If they’re comfortable with this, that’s fine, but the question is are they comfortable with it?” he said.
“If people are aware of that and they understand what they’re doing and they’re building portfolios to deliver a certain amount of yield and a certain amount of income per year and that’s enough for them to live on, that’s fine.
“I’m not saying people need to change that. It’s more about people who perhaps are not aware their portfolio has more risk in it than what they expect.
“This is where we think there’s a conversation advisers, accountants and clients need to have about what level of risk is actually in the portfolio.”