Rescue package for ailing DIY funds
Monday, October 22, 2007/
Is your DIY super fund in good health? Could it be time to pull the plug? SmartCompany unearths four key steps to diagnosis. By MICHAEL LAURENCE.
By Michael Laurence
Is your DIY super fund in good health? Could it be time to pull the plug? SmartCompany unearths four key steps to diagnosis.
Just 386 self-managed super funds were wound up in 2006-07 – against almost 42,000 that were setup, according to the latest statistics from the tax office. The low closure rate could be a signal that something is not right with thousands of Australia’s DIY funds.
Most closures would be attributable to either the deaths of members or members becoming too elderly to look after their own super. In other words, there would have been no option but to close them down.
The closure numbers suggest that many members could be holding on to their DIY funds despite such factors as poor returns, excessive operating costs due to low balances, member disinterest or inertia, and lifestyle changes that leave insufficient time to properly look after a fund.
Smart fund members should treat the miniscule closure rate as a wakeup call to either ensure that their funds are competitive or to get out of DIY super – and to roll their retirement savings into large funds.
Here are four key steps to checking on the health of your DIY fund, understanding how to get an ailing fund back into shape, and knowing when (and how) to call it quits.
1. Check your fund’s performance
This is really the starting point. Members should ask themselves “Is my fund at least matching the performance of the big super funds?”
Have a look at the website of fund rating agency SuperRatings for the latest returns of the big funds’ balanced, diversified portfolios. (SuperRatings classifies balanced portfolios as those with 60% to 76% of their investments in growth assets of mainly shares and property.)
The median returns for the balanced portfolios surveyed by SuperRatings were 14.2% over the 12 months to 31 August, 11.62% annualised over five years and 9.7% annualised over 10 years. And the top quartile balanced funds recorded a breathtaking median return of 16% in the 12 months to August 31. (The returns are after investment management fees and taxes).
Of course, the asset allocation of your DIY fund – meaning its investment mix between mainly shares, property, bonds and cash – could be very different to the balanced portfolios of the big funds. You are most unlikely to be comparing apples with apples.
Research by the tax office and specialist researcher Investment Trends shows that DIY funds generally hold more cash and direct property in their portfolios than the balanced portfolios of their large counterparts. This means the returns and the levels of risk could significantly differ.
Nevertheless, a comparison with the big funds may indicate whether you are forfeiting returns by running a DIY fund.
Another useful exercise is to examine how the components of your fund’s particular investment mix – in particular its shares, property, bonds and cash – have performed against the relevant market indices such as the S&P/ASX200 Accumulation Index (comprising changes in share prices and dividend payments).
2. Understand the reasons for poor performance – and do something about it
Various studies show that one of biggest causes for lousy performance is that a fund’s investment mix is poor. Funds that are investing for the long term should have sufficient growth assets to, at the very least, counter inflation and running costs. Indeed, most funds should expect a decent margin on top.
The Australian Securities & Investments Commission’s basic tips on DIY funds are worth a look.
Once fund members are confident that their funds’ asset allocation or investment mix is correct and suitably diversified for their personal circumstances – including their tolerance to risk, time until retirement, investment goals and retirement needs – members can then question whether their actual investment selection is appropriate.
Investment advisers typically warn their clients about investing too much of their portfolios in a single investment and failing to diversify between investment managers with different investment styles.
More DIY funds are turning to listed investment companies, albeit still in small numbers, to provide low-cost foundations for their share portfolios. (See Wealth/Super October 2, 2007.) Listed investment companies have holdings in a large number of public companies.
Wholesale managed share trusts with a range of investment styles are also used as at least foundations for many DIY funds’ share portfolios.
3. Get professional help
A quality investment adviser with considerable experience with DIY funds is well-placed to advise you about how to rescue an ailing DIY fund – by mainly changing its asset mix and investment selection.
The Self-Managed Super Fund Professionals’ Association of Australia has a valuable service that enables the public to search online for specialist DIY fund advisers.
4. Know when to quit
If you can’t get your fund back into shape or have simply lost interest, think seriously about closing it and rolling your super savings into a big fund. Closing a fund is not complicated. (See the tax office’s brief summary of what should be done.)
The closure of a DIY fund involves calculating the fund’s assets and liabilities such as taxes, administrative costs and regulatory costs; distributing remaining assets to members (this may involve rolling the assets into other super funds or making payouts to retired members if requested); and lodging final regulatory and tax returns to the date that the fund is being wound up. (See Wealth/Super, March 6, 2007 for more details about closing a DIY fund.)