As we have just finished another financial year, it’s a good time to ask yourself: “How did my fund perform this year, and what action should I take, if any?”
Your investment return is an absolute number. Investment performance, on the other hand, is a relative measure. It is a function of both risk and return.
Prudent self-managed super fund investors regularly ask themselves the following questions:
- What was my investment return, using a method which allows fair comparisons?
- How did my investment return compare with other SMSFs and an appropriate benchmark?
- How did my investment return compare with others who took a similar level of risk to me?
- Was my performance due to luck, or is it likely to be repeatable?
- Could I have achieved a similar return at a lower level of risk?
We’ll define “defensive assets” as cash and fixed interest, and “growth assets” as everything else, because of the source of returns in each case.
The graph below shows Asset Allocation Risk Vs Return for 14 SMSFs, over the same period. Consider Bob.
How did my investment return compare to other SMSFs and an appropriate benchmark?
What’s an “appropriate” benchmark for Bob to compare against is a large topic on its own and we’ll leave that for another day.
How did Bob’s fund compare to all other funds?
In this case, there are 14 funds, and Bob out-performed 7 of them, so on this first analysis Bob may feel that all is well.
How did my investment return compare to others who took a similar level of risk to me?
Bob invested with 80 per cent in growth assets, as did six other funds. Of these, seven funds with a similar level of asset allocation risk, Bob only out-performed one of them.
This may raise some questions in Bob’s mind. He may decide to keep an eye on it. It may just be a short-term under-performance, but what if Bob found this was consistently happening over a longer period. Should he feel bad, and refuse to look at any more reports?
Of course not, he’s received some valuable information. He could decide what action to take, either on his own, or with a trusted adviser.
Was my performance due to luck, or is it likely to be repeatable?
Bob may have invested in a diversified ETF, where his funds were spread across over 200 companies. He may be satisfied that his approach remains appropriate. On the other hand if he had speculated into one mining company, he may benefit from asking himself this question.
Could I have achieved a similar return at a lower level of risk?
Bob earned a return of 10.5 per cent with 80 per cent of his portfolio exposed to the riskier growth assets, yet Sarah achieved the same return with only 60 per cent of her portfolio exposed to the riskier assets.
So Bob has taken some “un-rewarded” risk compared with Sarah. He needs to consider what action he should take: Maintain his current approach, modify it or perhaps adopt a new approach.