Asset Allocation

Equity Markets do not always rise.  They can go down as the recent bear market demonstrated.  Many investors can spend years recouping these losses.  SMSF investors are not tied to any particular asset allocation unlike Retail or Industry Superfunds.  Investing in a traditional Super environment exposes you to the investment strategy of that Fund.  Importantly traditional Super is obligated to remain fully invested as governed by its charter.  So even if the professional Fund Managers believe equity markets will fall they can at best underweight equity investments.  They cannot eliminate exposure to the equity markets completely.   Whilst we do not recommend any particular investment style it is important to note that a SMSF Investor can nimbly move between asset classes without the restrictions faced by larger Superfunds.  Clients at times may determine it appropriate to be out of the equity market and remain in cash. Cash paying a risk free return can be a better option than a market that is decreasing in value.

Investment Choice

Having your own SMSF allows you to make your own decisions about investing your Super.  So instead of having your Super invested in one Fund chosen by your employer, you can diversify your Super investments over a range of different asset classes and reduce your reliance on just one Fund Manager.  Importantly you decide where you Super Benefit will be invested.  You have total control.  In fact ESUPERFUND clients have a complete range of Investments to choose from to invest their Super Benefit including Term Deposits, Online Savings Accounts, ASX Listed Securities, Property, Exchange Traded Options, CFDs, Australian and International Managed Funds, Bonds, Metals, Commodities, FX, International CFDs and more.  Clients can even borrow to invest in Residential and Commercial Property.  For more visit our Investments section here.

Maximise Investment Returns

The aim of establishing your own SMSF is not only to reduce fees which has been considered in Strategy 2, but also to maximize returns (with due consideration given to risk).  The amazing savings achieved with reductions in fees applies equally as well to increases in percentage returns.  That is achieving an extra 1% per annum in investment returns over the course of your working life will have a remarkable effect on your end Super Benefit.  A benefit measurable in the tens of thousands of dollars.

After Tax Returns

We are all familiar with the Performance Tables published by Investment Publications.  These Tables report the average yearly, 3 yearly, 5 yearly etc returns of the larger Superfunds. The problem with these Tables is that they do not report the after tax returns.  In many cases, especially when the markets are strong the majority of returns generated by larger Superfunds come from realized capital gains.  These are distributed to the investor reducing the annual super investment return by up to 15% in value (the Superfund Tax Rate).  SMSF Investors do not have this problem.  They can choose to hold onto to their investments and are not forced to crystallize capital gains by selling.  Importantly by waiting until they retire they can eliminate the tax on their investments entirely.

Example:

Consider an Investor who is 40 years old and has $200,000 in super.  Assume he generates an annualized investment return of 8% per annum leading up to his retirement at age 65.  Now assume that each year the Superfund that he invests in receives 3% of its investment as concessionally taxed capital gains, which is common.  Based on a concessional SMSF tax rate of 10%, the annual after tax return falls to 7.2% per annum. The Investment Tables will however continue to report the 8% per annum as the Fund's return, which is misleading.  So what difference does the reduced return create in the Investor's Super Benefit at age 65?  Well at 8% per annum the Investor would have $1.370m.  At 7.2% per annum (the real after tax return) the Investor's benefit falls to $1.137 million.  The difference is $233,000 and that ignores SGC contributions which makes the difference even bigger.

So how does a SMSF Investor avoid the above outcome?  Investor's who invest directly in the market using their SMSF do not have to sell to realize their investment return. They can simply hold their investments for the long term. This means that the SMSF Investor who invests for the long term and is not an active trader, who generates a return of 8% per annum gets to keep the whole 8%.  The tax man only gets his money when you sell.

Whilst most investor's assume that the ATO will eventually get his share when you sell, be it now or in 25 years time, this is not actually the case.  This is because if you sell after you commence a Pension you never pay tax on the capital gain.  Even if the capital gain relates to the previous 25 years!  This means that even if you match the return generated by professional Fund Managers you will be significantly better off when you compare the after tax returns achieved.  Put another way, in the above example, the Professional Fund Manager would have to generate an additional return of up to 1% per annum for 25 years straight compared to the SMSF "Buy and Hold" Investor just to match their after tax return.  This is certainly a difficult task.

Gearing your Super

A SMSF even allows you to leverage your Investments.  For example clients of ESUPERFUND are permitted to borrow invest in Australian Residential and Commercial Property.  In addition you can now legally leverage your trading using CFDs.  CFDs are powerful leveraged instruments that can give you maximum exposure for minimum outlay.  CFDs allow you to trade ASX Shares, International Shares, Sectors, Indices, Interest Rate Securities, Commodities and Foreign Exchange using a single trading account.  These leveraged products if used conservatively can supercharge your Investment Returns. The same leveraging opportunities generally do not exist using larger Superannuation Funds.

The New Enemy:  Performance Based Fees

Equity Markets rise and fall.  This is the nature of Markets.  The good years help to offset the bad years when the market declines.  Recently a disturbing new trend has emerged in the Super Industry where Fund Managers are keeping a portion of your investment return when they outperform the Index.  For example some Fund Managers keep 25% of the excess return over a set benchmark (eg the ASX200).  So if the ASX200 earns 8% in a particular year and the Fund Manager earns 10% they will keep 25% of the excess above 8%.

Worse still the Fund Managers in some cases calculate their performance bonus before their fees.   So if they earn 10% and charge fees of 2%, the net return of 8% would presumably match the ASX200 performance in the above example and no performance bonus would be payable.  Not so.  Some Fund Managers argue that they beat the Index because the gross return beat the index.  So after applying their bonus fee, the investor ends up with less than the 8% ASX200 Return, even though the Fund Manager claims that they have outperformed the Index. Strange indeed.

Not surprising in the years when the market falls, the Fund Manager keeps his fee in full.  In short they take some of the upside when the markets are rising and share none of the risk when the markets are falling.  The point here is that Fund Managers are coming up with different ways to make more money for themselves at your expense.  SMSF investors looking after their own Investments can avoid these silly situations deriving better returns for their Super over the long term.

Putting it all Together

Small percentage changes in your annual percentage return can have a dramatic impact on your Super Benefit at retirement.  As the above examples demonstrate, a SMSF can help boost your Investment Return and maximize your wealth at retirement.  By adopting buy and hold strategies or simply investing in cash and avoiding Market falls, you can dramatically boost your Investments annual performance and your Super Benefit in retirement.