When the global financial crisis savaged retirement savings in 2008, many self-managed super funds escaped the devastation better than other super funds.
What's behind this better performance?
There's nothing inherently better about DIY funds – but a likely reason was their asset allocation strategy.
As this week’s graphic shows, people who manage their own super tend to invest very differently to the professionals who run managed funds.
Self-managed funds put most of their money into cash, Australian shares and property. On the other hand, they put virtually nothing into fixed interest or international shares. In the jargon, they are far less diversified.
On the whole, this approach has worked pretty well for the growing army of people managing their own retirement savings.
There are more than half a million self-managed funds out there, so making generalisations about this sector is fraught. But the aggregate figures tell a positive story.
After fees, SMSFs have delivered higher returns than regulated funds in seven of the last eight years, according to figures from Rice Warner and the Tax Office. After all, cash was safe during the GFC, property has been booming and shares recovered well.
The big question, however, is whether the much less diversified approach favoured by SMSFs will make sense in the future.
Is such a heavy reliance on cash, for instance, really the best investment option?
Perhaps not. When interest rates are at record lows deposit rates have continued to fall this year. The average one-year term deposit rate today is now just 3.4 per cent – less than inflation for anyone with a marginal tax rate of 30 per cent.
SMSFs' low exposure to international shares could also be a disadvantage.
SuperRatings says that last financial year, the typical international share option within a fund returned 17.6 per cent, better than the 16.8 per cent gain for Australian equities.
If the Australian dollar were to fall, these returns could be enhanced even further, and many DIY funds could miss out on the upside.
There’s also an argument that all super funds – self-managed and regulated – will need to hold more fixed-income assets as more people move from accumulating savings to retirement. These fixed-income assets are generally harder for retail investors to buy.
Over the longer term, some experts reckon self-managed funds will gradually adjust their asset allocation to become more like the managed funds.
But the broader point is that anyone considering an SMSF should not assume they are a better option just because they can have lower costs and give you autonomy.
Fees are important, but so is asset allocation. While conditions have suited the strategy used by many SMSFs over the last few years, undiversified funds focused on cash, local shares and property could face a more challenging future.
