Underperformance factor identified

SMSF underperformance

Analysis of SMSF data has identified the defining factor as to why certain funds underperform other types of retirement savings vehicles.

The latest research into SMSF investment returns has revealed significant holdings in one particular asset class was the common denominator in funds that showed underperformance compared to their Australian Prudential Regulation Authority (APRA)-regulated counterparts.

“[The research showed] the more present [one asset class] is, the greater the underperformance and that’s, as you might expect, cash and term deposits,” University of Adelaide lecturer George Mihaylov said while presenting the results of the “Understanding self-managed super fund performance” report.

Mihaylov added the experience of investment markets over the past decade made this finding unsurprising.

“Given the environment that we’ve experienced over this last, let’s say, five to 10 years, low interest rate environment, it’s completely understandable that cash and fixed term deposits have underperformed other asset classes,” he said.

“[This is] especially [so] when you consider the significant bull markets since the COVID [related] drops in the markets and even prior to that.

“Post [the] GFC (global financial crisis) we’ve been [witnessing] an unheralded boom in financial markets.”

While this was the experience for certain SMSFs over the past decade, he said there was no suggestion the asset class would represent such a poor portfolio performer in the future.

“We may very soon find ourselves in an environment where cash and term deposits [start to do] better and interest rates start increasing, which is a widely held expectation now given what’s happening with inflation,” he noted.

“So I don’t want to say to SMSFs don’t hold cash, but over the period of time that we looked at, yes, cash was the key predictor in asset classes that led to underperformance.”

When looking at the analysis from the opposing perspective, he said there were no obvious asset classes in which SMSFs did not have allocations that led underperformance versus public offer funds.

Another key finding was SMSFs with a balance of at least $200,000 achieved comparable returns to APRA-regulated funds.

The “Understanding self-managed super fund performance” report was conducted by the University of Adelaide’s International Centre for Financial Services on behalf of the SMSF Association using Class and BGL Corporate Solutions data. Information was compiled from over 318,000 SMSFs between 1 July 2016 and 1 July 2019

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