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Asset classes: Naming the investment winners for the 2011 calendar year

Trish Power — Mon, 30 Jan 2012 04:13:43 +0000

Diversification was the key message for 2011, according to Warren Chant of rating company, Chant West. He says that the strong performance of unlisted assets has had a stabilising effect on fund returns in 2011.

“The benefits of diversification were clearly evident in 2011. Although both Australian shares and international shares fell, by 11% and 5.3% respectively, by being well diversified across a wide range of growth and defensive asset sectors, the loss for the median growth fund was limited to 2%,” explains Chant.

“The same comment applies when we look back over the past five years. This period, which includes both the GFC and the more recent sovereign debt-driven crisis, has been highly unusual in that both Australian and international shares have gone backwards. Yet, by finding alternative sources of return, including unlisted growth assets such as infrastructure, property and private equity, even some growth funds have produced a small positive return.”

Background: Your super fund invests in a mix of asset classes to generate an investment return on your super account, which means that some of your super money is likely to be invested overseas, a fair chunk invested in Australian assets, and a portion squirreled away in cash. The super money of most Australians is invested via a balanced or growth investment option, typically 61-80% of assets are in growth-style assets such as shares, property and alternative investments, and 20-40% are in income-style assets such as cash and fixed interest (bonds). If you choose your own investment option, or you run your own super fund, then you decide on the mix of asset classes for your super savings, including whether you have exposure to international assets, and whether you have exposure to foreign currency movements (that is, unhedged).

Briefly, when a super fund hedges your international investments against movements in the Australian dollar or foreign currency, your investment return is solely based on the merits of the investment rather than the strength or otherwise of the Australian dollar. If your super fund chooses not to hedge your international investments, then the return you may receive on this part of your portfolio may have very little to do with the merits of your investment. I explain the significance of hedging in more detail in my article Ban unhedged international shares in default investment options.

According to figures from rating company, Chant West, the top-performing asset class for the 12 months to 31 December 2011 was Private Equity with a 12-month return of 12.1% closely followed by Australian Bonds (11.4%) and International Bonds (hedged) (10.5%). Coming in fourth was Unlisted Infrastructure (9.6%) and a close fifth was Australian Unlisted Property (9.3%)

The table below sets out the performance figures for 13 asset classes (or sub-categories) for investment periods of 3 months, 6 months, 1 year, 3 years, 5 years, and, if applicable, 7 and 10 years.

Top performing asset classes for 10-year and 5-year periods to 31 December 2011

The top performers among the 13 asset classes (or sub-categories) are different when you look over a longer timeframe. For example, over a 10-year period, International Bonds (hedged) has outperformed all asset classes with an average annual return of 8.2%, followed by Australian Bonds with an annual return of 6.5%, and then Australian shares with an annual return of 6.1%.

Note: Figures over the 10-year and 7-year period to 31 December 2011 don’t include performance statistics for private equity, global listed property (hedged), global listed infrastructure (hedged), Unlisted Australian property, and unlisted infrastructure, due to the relatively recent development of these asset sub-categories.

The devastating effects of the Global Financial Crisis (GFC) can be seen in the 5-year performance figures for the higher risk asset classes, such as shares, listed property and private equity. The top performers over the 5-year period are international bonds (hedged) with an average annual return of 8.7%, followed by Australian bonds (7.4%), Unlisted infrastructure (6.5%), Cash (5.5%) and then Australian unlisted property (5.3%).

Australian shares have delivered a depressing loss of 2.4% a year over the same 5-year period, and international shares (hedged) a pathetic loss of 3.5% a year. Even worse, international shares (unhedged) delivered negative 7.5% every year for the past 5 years, on average, while Australian listed property, that is A-REITs delivered a shocking negative 15.2% every year for the past 5 years. What this means for investors in A-REITs, is that their A-REIT investment is a quarter of what it was worth five years earlier.

Asset Sector Performance: Gross performance to December 2011
Asset Sector	3 Mths (%)	6 mths (%)	1 Yr (%)	3 Yrs (% pa)	5 Yrs (% pa)	7 Yrs (% pa)	10 Yrs (% pa)
Australian Shares	2.1	-9.8	-11.0	7.7	-2.4	4.4	6.1
International Shares (Hedged)	8.0	-8.1	-5.3	9.4	-3.5	1.6	1.6
International Shares (Unhedged)	2.0	-6.2	-5.3	-2.6	-7.5	-1.8	-3.5
Private Equity	0.6	4.9	12.1	3.9	3.5	-	-
Australian Listed Property (REITs)	3.8	-4.6	-1.6	2.3	-15.2	-5.7	0.6
Global Listed Property (REITs)	8.3	-7.4	1.4	16.6	-6.4	2.2	-
Australian Unlisted Property	2.5	4.6	9.3	2.8	5.3	-	-
Global Listed Infrastructure (Hedged)	5.5	0.1	4.7	6.7	0.6	-	-
Unlisted Infrastructure	-0.6	2.1	9.6	4.1	6.5	-	-
Australian Bonds	1.9	6.6	11.4	6.3	7.4	6.5	6.5
International Bonds (Hedged)	2.0	6.4	10.5	9.3	8.7	7.8	8.2
Hedge Funds	1.1	-5.7	-5.0	7.9	2.3	-	-
Cash	1.2	2.5	5.0	4.4	5.5	5.6	5.4

Source: Chant West, 23 January 2012 media release (www.chantwest.com.au)

Table notes: The table contains gross investment returns, that is, investment returns before fees and taxes have been deducted. The asset classes and categories listed are the main asset sectors that super funds invest in. Chant West has used market indices for performance figures for all sectors other than private equity and unlisted infrastructure. For those two categories, Chant West has used the returns of a major super fund in the Chant West survey that is representative of those sectors.

Do I pay tax on a super account in the last year of accumulation phase?

Trish Power — Thu, 26 Jan 2012 14:54:31 +0000

Q: On April 1 2012 I am transferring from accumulation phase to pension phase (I turn 65 on March 27 2012). Is my super fund subject to tax (for 2011/2012 year) on income earned up until the date of conversion, or is no tax payable because the fund has been converted to pension phase?

Earnings are taxable on a super account in accumulation phase, even when the account is in accumulation phase for only part of the year. A super fund may need to obtain an actuarial certificate to verify the earnings relating to accumulation phase, and to verify the tax-exempt earnings relating to pension phase.

The following articles may assist you further:

SMSFs: Calculating tax-free components

Trish Power — Sat, 14 Jan 2012 01:19:08 +0000

Q: Assuming my SMSF today has an tax-free component of 40% of the total, and in the future I roll over an employer based super into my SMSF, does the tax-free component remain at 40% of the new total or does it have to be recalculated?

We are an information site rather than an advisory site, so we cannot provide specific advice on the component calculation, but we can provide you with general information on the question that you ask.

In short, the tax-free component is recalculated but the timing of this calculation depends on whether you take a lump sum or income stream.

The article SMSFs: What is the proportioning rule? will best assist you.

SMSFs and joint property purchases

Trish Power — Fri, 13 Jan 2012 22:55:45 +0000

Q: A SMSF purchases a property in joint names – between the two trustees as joint tenants and the SMSF (tenants in common). The conveyancing document says the title statements show the ownership as 60% SMSF and the Trustees 40 % . However the trustees have used 79% of the SMSF funds to purchase the property. How do we prepare the financials and tax return to reflect the true ownership? For instance should the asset be 60 % and the excess monies treated as a loan from the SMSF to the Trustees?

I am unable to respond to the specifics of this question because it will be deemed to be financial advice, and I am unable to provide financial advice. I suggest you speak to an adviser, or your adviser (if you have one) to determine your next steps, because there appears to be a few compliance issues involved as well as practical issues in relation to ownership. I suggest you also talk to the conveyancer about your options.

Note also that a SMSF cannot lend money to SMSF members/trustees.

How do I find a SMSF provider?

Trish Power — Fri, 13 Jan 2012 21:23:33 +0000

Q: I would like to know who is the best SMSF specialist in Perth who I can get to do my SMSF audit and tax return and give me the best advice on what to do.

Unfortunately I am unable to assist you with specific recommendations. We have developed a superannuation and financial services directory (www.superguide.com.au/directory), which may be a starting point for your search.

Note that this is a free directory and we do not endorse or otherwise the companies that are listing.

The majority of SMSF specialists are members of either SPAA, CPA Australia and ICAA, although not all SMSF specialists belong to these organisations.

You may also find the following articles helpful:

What is a cost-effective trust deed update solution?

Trish Power — Tue, 10 Jan 2012 00:34:28 +0000

Q: We have a Trust Deed which should be updated and I figure the best way is to amend it by simply replacing it. What is best way of going about it without having to “pay all over again”? Is there a law firm/administrator who specialises in this activity?

For background you should first read the article, SMSF basics: Updating SMSF trust deeds where I explain the difference between a Deed of Variation and simply replacing the deed.

There are quite a few trust deed providers and administrators who provide a Deed of Variation service, which in effect replaces all the terms of the deed but not the deed itself. Make it clear when you’re conducting your enquiries that you’re seeking to update your deed rather than establish a new deed because the process is different, although the result is similar because the practical effect is that you will be using a standard-style deed that can be updated using standard updates from your provider. Again shop around on how regularly a provider updates the trust deed. For example, it may be updated once a year for the cost of $99 a year.

I am not permitted to recommend a particular provider but you could also refer to the Trust Deeds and other documentation section of the SuperGuide Directory.

Using unit trusts for purchasing property through your SMSF

Trish Power — Mon, 09 Jan 2012 23:42:14 +0000

Q: I’ve just finished reading DIY Super for Dummies and found it really helpful. What interested me was the borrowing options for SMSFs. We already own a property in our fund and are looking at instalment warrants for financing our next purchase. In your book you mention joint venture to invest in property with fund members, which is purchased through a unit trust structure. Any information you can give me, or web sites with information about unit trusts would be really appreciated as I haven’t had much success myself.

Many thanks for your email and I’m pleased that you found my book useful.

In relation to your question about joint ventures and unit trust structure, the best person to help you is an accountant who works with a lot of SMSFs. Most accountants who work in this space are familiar with these arrangements.

You’re right about information sources being scarce but here’s a few you can try:

Taxpayers Australia runs a superannuation service called Superannuation Australia. They have a DIY Superannuation manual (you can check out a preview for free), and a quarterly newsletter that generally services the financial adviser and accountants – often they have articles on this type of arrangement
Max Newnham’s book, SMSFs: A survival guide has a section on this issue
Presumably, the following book would explain this strategy as well: How to Buy Property With Your Super Money by Tony Melvin and Ed Chan (Knowledge Centre). (I haven’t read it but their earlier book covered the strategy)

If anyone recommends other resources on this topic, I would love to hear about them.

You may also find the following article useful: Limited recourse borrowing: What you can and can’t do under the new super rules.

Pensions: How is the tax on lump sums assessed?

Trish Power — Mon, 09 Jan 2012 06:37:29 +0000

Q: Thanks for being there. For many, many years your books and now your website have run my SMSF for me! Is it still necessary when commencing an account-based pension particularly for a person under 60 to take the tax-free amount out as a lump sum and recontribute it to have it as a tax-free component, or is it automatically taken as tax-free when assessing the tax on the pension now? I guess the same question applies for people over 60 (just in case the tax law changes).

Many thanks for your lovely comments about my books and our website.

In brief, the re-contribution strategy you are referring to is designed to minimise tax payable on any super benefits taken before the age of 60. The taxable component of a superannuation pension is still subject to tax under the age of 60. The proportion of tax-free benefit at the start of an income stream, remains the tax-free proportion for the life of the income stream.

The following SuperGuide articles may also be of some help:

Are there any problems dealing with online Trust Deed providers?

Trish Power — Mon, 09 Jan 2012 04:12:26 +0000

Q: Thanks for the super site – it has been very useful for me as a Trustee of my family SMSF. I have also bought your book, DIY Super for Dummies, which has been very informative and explained many issue in plain english. My question relates to updating the Trust Deed. I have looked at several online providers who will send me a Deed of Variation and an up-to-date Trust Deed for a nominal fee. These Trust Deeds appear to be put together by reputable law firms and I am considering purchasing from one of them. It all looks ok from my brief investigation but I was wondering if you had heard of any problems dealing with these online providers?

Below are some articles I’ve written previously on this issue:

In response to your question about any negative comments about online providers, oe comment that I can make is that if you have a fairly regular fund without much complexity then online providers can provide a cost-effective service. If you have special needs requiring specialist consulting advice, then your costs may add up for those services using an online provider.

Also, depending on who you use, you are generally required to use a specified bank for your fund’s banking needs and may even be asked to use a specific broker for share transactions. You may also be offered financial planning services that may or may not be fee-for-service.

Can my SMSF buy a property without paying tax?

Trish Power — Mon, 09 Jan 2012 02:14:37 +0000

Q: Can I sell my managed funds within my super fund and buy a rental property for the same amount without paying any taxes?

We are an information site rather than an advisory site, and the answer to your question depends on the type of managed fund interests that you hold and how any capital gains (if any) are treated by the managed fund/trust and the value of the units that you hold.

The following resources may be of assistance:

The Australian Tax Office has produced a useful document on capital gains tax that covers individuals and superannuation funds. Although the publication is designed to help taxpayers complete the 2010-2011 tax return, the document provides some excellent explanations on how to calculate an asset’s cost base, how to work out the capital gain or loss, and how to calculate the net capital gain/loss if your fund has bought sold more than one asset. You can find a copy of the ATO’s ‘Guide to capital gains tax 2010-2011’ by clicking on this link. In particular, look at the three extracts ‘What is the cost base?’, ‘capital gain’ ‘capital loss’.
Another useful publication for background information is the ATO publication, ‘Personal Investors Guide to capital gains tax 2010/11′, but note this is not designed for SMSF trustees. It does however have helpful examples. See this link.
A SuperGuide article explaining how CGT works for SMSFs: CGT calculations for SMSFs

How long before I can convert an Accumulation fund to a Pension?

Trish Power — Fri, 06 Jan 2012 06:10:34 +0000

Q: I am 67 and work part time. I do qualify to make concessional contributions to our SMSF, (from which I am already receiving an Account based Pension). These new contributions will have to go into an Accumulation Account, how long do I have to wait before our SMSF can pay another account based pension from these new funds? Can I start the new account based pension as soon as I meet another “condition of release”, ie stop my part time employment?

We have similar questions to yours on SuperGuide over the past few months, and the most relevant article is Tax-deductible contributions: timing the start of pension is essential.

In relation to satisfying a condition of release, when an individual is already over the age of 65, any superannuation benefits held by that member can be withdrawn at any time. Note there are special timing rules in place when an individual makes concessional contributions and intends to start a pension using those contributions. The article above explains these rules.

We are an information site rather than an advisory site so I recommend you confirm your specific circumstances and needs with a SMSF specialist or your adviser/accountant.