“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.

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.

Related posts:

1. Asset classes: Naming the investment winners for 2011
2. Super funds deliver 9.2% for 12 months (2010/2011 year)
3. Super funds deliver 10% for 2009/2010 year

I’m not sure if you’re asking whether you can access your super and deposit it in a bank account, or move your super into a cash investment option within your super fund.

Many super funds offer a cash option but check that the investments are pure cash rather than bonds and other fixed interest items.

The following articles should help you with either question:

• Accessing super early: 12 legal reasons to cash your super
• Super for beginners, part 20: Comparing your super fund’s performance
• Asset classes: Naming the investment winners for the 2011 calendar year
• Investment performance: Benchmarking super fund returns

Related posts:

1. Super for beginners, part 20: Comparing your super fund’s performance
2. THE SOAPBOX: Is your super fund gambling with your retirement savings?
3. Asset classes: Naming the investment winners for 2011

Trish’s response: Many thanks for your words of support for SuperGuide. We believe there is a need for a free and independent site for consumers on superannuation, and the many emails that we receive and the exciting growth in the number of new and regular visitors to the website, has confirmed that a website such as SuperGuide is necessary.

SuperGuide provides independent information on superannuation for consumers. In keeping with the independence of the website, we do not operate a financial advisory business, and we do not recommend particular advisers or financial products or organisations. We do however operate the SuperGuide Directory which allows advisers and other super-related service providers to list for free, and serves as a starting point for our readers seeking expert assistance.

I cannot provide you with specific financial advice about your investment options, or whether AustralianSuper is a secure option, or whether there are better cash options available in the market place. What I can do is provide some general information for anyone hoping to compare their super fund’s investment returns with other super funds in the market.

Checking the reputation of a super fund

For example, if a reader is seeking information on whether a super fund is secure and strong you can visit the particular super fund’s site or phone the super fund and ask them this question. For an outsider’s view, many of the large super funds, including AustralianSuper, are reviewed by rating companies such as SuperRatings, SelectingSuper and ChantWest, which, depending on the rating a super fund receives, generally indicates the super fund is going to be around for awhile. You can visit any of these rating company websites to find out what ranking a super fund has received. I also provide a periodic summary of the top-performing super funds in the article Investment performance: We’re the best super fund. No we’re the best…

Reviewing a super fund’s investment performance

If you’re seeking information on assessing your fund’s investment performance, then you need to be mindful of at least three factors that determine a fund’s investment performance – asset allocation, level of fees (after tax) and quality of investment management over the longer term. For example, a cash option is going to deliver a lower return over the longer term than shares or property, even though for the previous two years or so, cash was king.

You can find out the performance of AustralianSuper’s cash option, and other investment options on its website (www.australiansuper.com) and the performance history page is here. This particular page on the website may be a useful reference for anyone interested in comparing the returns of super funds because along with the specific returns delivered by AustralianSuper, at the bottom of the webpage you can click on a spreadsheet that provides the benchmark returns for the different investment options, which you can measure against your own fund’s returns. Many super funds present the investment performance data in a similar format.

You may also be interested in some of the following free or low-cost information services.

1. Check out APRA whole-of-fund performance tables. The Australian Prudential Regulation Authority releases league tables listing the investment performance of the 200 largest APRA-regulated super funds. Note that the APRA tables don’t report investments returns on pension accounts (see Point 4), or returns on the different investment options available within a super fund. Find out more about the APRA tables by reading the SuperGuide article Exposing the performance history of Australia’s largest 200 super funds or access the APRA tables directly by clicking here.
2. Follow the daily newspapers. Monthly, or quarterly, many of the major daily newspapers publish tables containing the top performing super funds and what the benchmark returns are for the different investment options. If your fund is missing from the top 10 or 20, that doesn’t necessarily mean your super fund is a dud performer because often the periodic tables are measuring the top performer for that month, or that quarter. What matters is whether a super fund is delivering a strong return over a long period of time. Some of the daily newspapers (usually on a Wednesday) also provide data on many of the retail superannuation funds. Retail super funds are generally offered by banks and other similar financial organisations.
3. Ask your super fund for advice. In July 2009, the Australian Securities and Investments Commission (ASIC) announced that super funds can now provide a limited form of financial advice to its fund members, provided the super fund holds an Australian Financial Services licence. The motivation for introducing this cheaper advice service is to give Australians some guidance when making decisions about increasing super contributions, changing investment options, or taking out life insurance within a person’s existing super fund. This cheaper advice option does not allow your super fund to give you more complex retirement planning advice, or to give advice about switching funds. The new option is explained in my interview with ASIC’s former head of superannuation, the chief architect of this new low-cost advice concept, and what it means for consumers, in THE SOAPBOX EXCLUSIVE: Cheap financial advice now available – what does it mean for consumers? Many super funds are now offering intra-fund advice, and in many cases this advice is provided free of charge. Ask your super fund what they can offer you in terms of intra-fund advice.
4. Check out ratings companies. SelectingSuper, ChantWest and SuperRatings provide a consumer service rating funds on different levels. You can compare one or two funds against your existing super fund for a fee. For no cost, you can check out the ratings for most of the large super funds available in the marketplace. SelectingSuper also provides free information on the top-performing pension funds.

Comparing funds: You can find more information on comparing super funds in the special section on the topic by clicking on the tab at the top of this website or by clicking here: ‘comparing funds’.

Financial advice: You can find more information on financial advice, and finding an independent adviser by typing in ‘financial advice’ in our search function at the top right-hand side of SuperGuide website.

Related posts:

1. Investment performance: We’re the best super fund. No, we’re the best…
2. Super for beginners, part 20: Comparing your super fund’s performance
3. Exposing the performance history of Australia’s largest 200 super funds

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

Background: 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 July 2011 THE SOAPBOX.

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).

Top performing asset classes for 2010/2011 year

The top-performing asset class for the 12 months to 30 June 2011 was Global Listed Property (hedged) with a majestic 12-month return of 32.5% before deducting fees and taxes, according to rating company Chant West. The second top-performing asset class for the 2010/2011 year was International Shares (hedged) with a 12-month return of 22.3% before fees and taxes, but a mediocre 2.7% on an unhedged basis (the worst performer), due to the strength of the Australian dollar. Global Listed Infrastructure (hedged) came in third with a return of 17.1%, while Australian shares came in

According to Chant West global Real Estate Investment Trusts (REITs), that is the official term for listed property investments, was the top performer for the second year in a row. Australian REITs returned a ho-hum 5.9% for the year, while Australian bonds returned 5.5% and international bonds (hedged) returned 6.9%.

Top performing asset classes for 10-year and 5-year periods to 30 June 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, Australian unlisted property has outperformed all asset classes with an average annual return of 9.5%, followed by international bonds (hedged) with an annual return of 7.9%, and then Australian shares with an annual return of 7.2%.

Note: Figures over the 10-year and 7-year period to 30 June 2011 don’t include performance statistics for private equity, global listed property (hedged), global listed infrastructure (hedged) 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 8.4%, followed by unlisted infrastructure (7.2%), Australian bonds (6.5%), Australian unlisted property (6.5%) and then cash (5.6%) and hedge funds (5.5%). Australian shares have delivered a dismal 2.4% a year over the same 5-year period, and international shares (hedged) a pathetic 0.5% a year. Even worse, international shares (unhedged) delivered negative 5.1% every year for the past 5 years, on average, while Australian listed property, that is A-REITs delivered a depressing negative 10.3% every year for the past 5 years. What this means for investors in A-REITs, is that their A-REIT investment has more than halved in value in the space of five years.

Source: Chant West

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.

Related posts:

1. Asset classes: Naming the investment winners for the 2011 calendar year
2. Ban unhedged international shares in default investment options
3. Super funds deliver 5.8% for 12 months to April 2011

Trish’s response: Before I respond to your question please note that the asset value thresholds used to determine what deeming rate to apply, are adjusted annually on 1 July.

Deemed income is when you assume a rate of return even when that rate isn’t necessarily what you actually earn on your investment.

Under the Age Pension income test, financial investments are deemed to earn individuals a specified rate of return, regardless of the actual rate of return. Effective from 1 July 2011:

• Singles: The first $44,600 of a person’ financial investments are deemed to earn income at 3% pa and any amount above $44,600 is deemed to earn income at 4.5% pa.
• Couples: The first $74,400 (combined) of a couple’s financial investments is deemed to earn income at 3% pa and any amount over $74,400 is deemed to earn income at 4.5% pa.

When the deeming rates rise, the deemed income from financial assets (such as shares and term deposits) counted for the Age Pension also rises, although that’s assuming your assets are still valued at the same level. Clearly, the value of a person’s financial assets can fluctuate as well, depending on the type of financial investments that a person holds.

Note: During the 2007/2008 year, the deeming rates were halved (from 4% and 6% reducing to 2% and 4%) due to the falls in interest rates. When interest rates increased, the deeming rates increased to 3% and 4.5%. The asset value thresholds (currently $44,600 and $74,400) used to determine what deeming rate to apply, are adjusted annually on 1 July.

According to Centrelink, deeming rates are set by agreement between the Ministers for the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA), and the Department of Education, Employment and Workplace Relations (DEEWR). Quoting from the FaHSCIA website:

The deeming rates are monitored on an ongoing basis. Any changes made to the deeming rates are usually made to coincide with the indexation of pensions, to reduce disruption to pensioners by reducing the number of changes to their payments. Changes are only made if a consideration of a range of relevant factors that determine the deeming rates indicates that a change is appropriate. However, changes can be made at any time if there are very significant movements in the factors taken into account.

Deeming rates don’t change as frequently as interest rates and the deeming rates are generally lower than term deposit rates. You can read about how deeming works in more detail by reading the Centrelink fact sheet on deeming (click here).

Note: Centrelink can exempt investments from the deeming rules in certain circumstances. You can find out about deeming exemptions by reading the Centrelink fact sheet on deeming exemptions (click here).

Background: You must satisfy both an income test and an assets test to become an Age Pensioner, and the test that gives you the lowest amount of Age Pension is the test that prevails. If you pass the assets test but fail the income test, or fail the assets test and pass the income test, you can’t receive the Age Pension.

The Centrelink website outlines the definition of ‘financial investments’ for the purposes of the Age Pension income test as follows:

A financial investment is defined as available money, deposit money, managed investments, listed security, a loan not yet repaid in full, unlisted public security, gold or other bullion and asset-tested income streams (short term). Financial investments also include:

• bank, building society and credit union accounts
• cash
• term deposits
• cheque accounts
• friendly society bonds
• managed investments
• assets held in superannuation and rollover funds held if you are of Age Pension age
• listed shares and securities
• loans and debentures
• shares in unlisted public companies
• gold, silver or platinum bullion.

Financial investments do not include:

• your home or its contents
• cars, boats and caravans
• antiques, stamp or coin collections.

Related posts:

1. Age Pension: Does my superannuation lump sum count for income test?
2. Age Pension: September 2011 rates now available
3. Age Pension: Is my super benefit counted towards the Centrelink Pension assets test?

Each quarter the ATO releases self-managed super fund statistics derived from annual return data. Some of the more interesting data outlines the investments that SMSF trustees choose, and how much SMSF money is invested in the different asset types.

I am always amazed that this information is not more widely disseminated. Around 450,000 SMSFs run by roughly 855,000 trustees control $430 billion-plus in assets. A more impressive statistic is that SMSF trustees control around a third of all superannuation money held by Australians. Ten years ago, SMSFs controlled only 10% of all superannuation money.

A fascinating aspect of this growth in SMSFs is that the investment behaviour of the 850,000 SMSF trustees is capable of influencing investment markets. A recent example is the uproar over the Cooper Review recommending the banning of investment in artwork and other collectibles. The immediate activism of the art world and the coin industry, which successfully killed the Cooper recommendation to ban collectibles in SMSFs, highlights the importance of the SMSF money to many investment markets in Australia.

Three most popular investment classes

Year in year out the three most popular investment classes for SMSF trustees are: direct shares, cash and direct property.

In 2004, these three asset categories represented two-thirds (66%) of all SMSF investments. As at March 2011, the three asset categories – Australian shares, cash and property – represented a massive 73% of all SMSF investments.

As at March 2011, SMSFs held 31.4% of fund assets in direct Australian shares, 26.4% in cash and term deposits, and 15.4% in direct property. Of the remaining 26.8% of the $432 billion in total SMSF assets, 15.7% was held in trusts (9.6% in unlisted trusts and 6.1% in listed trusts), 5% in ‘other managed investments’ and the remaining 6.1% spread across 12 other categories.

More than six years earlier, as at June 2004, SMSFs held 31% of fund assets in direct Australian shares, 23% in cash and term deposits (and debt securities), and 12% in direct property. Of the remaining 37% of the $130 billion in total fund assets, 21% was held in trusts (10.6% in public trusts and 10.6% in other trusts), 6% in managed funds, and the remaining 7% spread across six other categories.

The table below outlines the gross asset allocations across all SMSFs.

*In June 2004, different classifications applied to the SMSF statistics. The writer has allocated the 2004 assets to the closest definition used today. For the specific classifications in place in June 2004 refer to the March 2011 SMSF statistics link on the ATO website.

Source: Adapted from ATO tables in the link above, and previous ATO statistics (www.ato.gov.au). Writer has included percentages and collated data to create a comparison table.

Does the asset allocation change for larger (or smaller) SMSFs?

The ATO also publishes statistics listing the asset allocations for different fund sizes. The latest data is as at June 2009, and I compare this data to allocations for the same fund size as at June 2004. The investment breakdown for four different fund sizes is set out below:

• Fund balance (>$150,000 and up to $200,000). In 2009, SMSFs of this size held 31% of fund assets in direct Australian shares, 37% in cash and term deposits, and 6% in direct property. Of the remaining 22% of assets, 12% was held in trusts (6% in unlisted trusts and 6% in listed trusts), 5% in ‘other managed investments’ and the remaining 7% spread across 12 other categories. In 2004, SMSFs of this size held 31% in direct Australian shares, 30% in cash, term deposits and debt securities and 10% in direct property. In 2009, there is a greater weighting to cash but this may not be a permanent trend: this could simply be a product of poor-performing share markets and the after-effects of the GFC on portfolios. The weighting to direct property for this fund size has dropped by nearly half over the past five years, which could simply be a consequence of a hike in property prices meaning that SMSFs holding property are going to be valued at a higher level.
• Fund balance (>$200,000 and up to $500,000). In 2009, SMSFs of this size held 31.5% in direct Australian shares, 32% in cash and term deposits and 10.5% in direct property. Of the remaining 26% of assets, 14% was held in trusts (7% in unlisted trusts and 7% in listed trusts), 6% in ‘other managed investments’ and the remaining 6% spread across 12 other categories. In 2004, SMSFs of this size held 30% in direct Australian shares, 25% in cash, term deposits and debt securities and 12% in direct property. In 2009, again there is a greater weighting to cash.
• Fund balance (>$500,000 and up to $1million). In 2009, SMSFs of this size held 31% in direct Australian shares, 30% in cash and term deposits and 13% in direct property. Of the remaining 26% of assets, 14% was held in trusts (7.5% in unlisted trusts and 6.8% in listed trusts), 6% in ‘other managed investments’ and the remaining 6% spread across 12 other categories. In 2004, SMSFs of this size held 31% in direct Australian shares, 22% in cash, term deposits and debt securities and 12% in direct property. In 2009, again there is a greater weighting to cash.
• Fund balance (>$1 million and up to $2 million). In 2009, SMSFs of this size held 30% in direct Australian shares, 30% in cash and term deposits and 15% in direct property. Of the remaining 25% of assets, 14% was held in trusts (8% in unlisted trusts and 6% in listed trusts) and 5% in ‘other managed investments’. The remaining 6% spread across 12 other categories. In 2004, SMSFs of this size held 32% in direct Australian shares, 21% in cash, debt securities and term deposits, 13% in direct property and a 22% weighting to trusts. In 2009, there is a greater weighting to cash and a drop in the money allocated to trusts, compared to 2004.

The overall observation that I can make from these statistics is that over time, and regardless of fund size, the investment behaviour of SMSFs is spookily similar when looking at total assets invested via the sector, and when looking at different fund sizes.

Typically, based on overall statistics, a SMSF invests around a third of fund assets in direct Australian shares, a third is held in cash and term deposits and between 10 to 15% held in direct property.

When examining the very small SMSFs and the very large SMSFs you can notice some clear differences. The smaller SMSFs have a much greater weighting to cash hinting at inactive funds. For example, the SMSFs with balances of less than $50,000 hold more than half in cash, and the SMSFs with balances of less than $100,000 (but more than $50,000) hold 44% of fund assets in cash. In contrast, SMSFS with more than $5 million in assets hold between 23% and 26% in cash, the lowest allocation of all fund sizes.

Both the largest and smallest SMSFs have the lowest allocation to direct Australian shares but presumably for different reasons. Based on the statistics, it appears that the very large SMSFs (more than $5 million) have greater diversification across asset classes although still strikingly similar to the overall asset allocation for the sector. In comparison, the smallest SMSFs (less than $100,000) have 75% to 80% of assets in two asset categories – direct Australian shares, and cash and term deposits.

Related posts:

1. SMSF investment: Can I invest my super money in my own company
2. SMSF investment: overseas property
3. SMSF basics: Can my DIY super fund borrow money?

The interim return for the median growth fund is 10.4% for the 2009/2010 financial year (12 months to 30 June 2010). Based on Chant West’s rankings, a growth fund typically holds between 61% and 80% in growth assets such as shares and property. A median is simply choosing the return for the fund in the middle of the list.

Some super funds may describe this type of asset allocation as a ‘balanced’ investment option, and this type of investment option is the typical default option for super funds. If you don’t actively choose your investment options for your super account, then your retirement savings will be invested in the default option.

The table below compares the median performance for each type of investment option, although your super fund may use a slightly different name for a similar asset allocation.

Source: Chant West media release, 22 July 2010 (www.chantwest.com.au)

Shares and property markets are top-performers

The upswing in super fund returns was a result of turnarounds in listed shares and in property markets, says Chant West. The top performing sectors for the 2009/2010 year included:

• Global listed property (Hedged) returning 39.1% (gross) for the year
• Australian listed property returning 20.3% (gross) for the year
• Australian shares returning 13.1% (gross) for the year

The Asset Sector Performance table (below) lists the returns for the different sectors over 3 months, 1 year, 3 years, 5 years, 7 years and 10 years to June 2010. The most disturbing aspect of this table is that the international markets have failed to deliver positive returns over a 10-year period, and most Australian superannuation funds have a significant exposure to overseas markets, especially the United States.

Source: Chant West media release, 22 July 2010 (www.chantwest.com.au)

Back to the past in two years’ time

Arguably, after two years of negative returns (investment losses) any positive return is good news. One of the more important questions fund members should be asking when ‘double-digit’ headlines appear, is whether super funds have regained the losses of the past two or so years, or are fund members still worse off than they were before the markets started turning in late 2007, and freefalling in October 2008?

Unfortunately, it may take another year, and probably two, to retrieve lost wealth if you agree with the comments made by Chant West director, Warren Chant about future returns. He says: “it’s sobering to think that growth funds still need a further 15% return from here to get back to the level they were at in late October 2007, before the GFC. That’s going to take some time, especially as the European debt crisis is showing no signs of going away and there are some doubts about the pace of growth in the US and Asia. The US reporting season that’s getting under way now is going to be very important for investor confidence.”

The other significant factor that super fund members need to consider is that not only are we trying to claw back lost wealth, but we need to measure the cost of missing out on future wealth accumulation. If, say, it takes two more years to return to the wealth levels of October 2007, an investor also has to account for the lost opportunities in the three years since that time. How long will it take to return to the long-term average of around 7% for a balanced investment portfolio?

According to Chant West, the long-term average return is reasonably on track. Director, Warren Chant says: “Most trustees set strategic risk and return objectives for their funds. Generally, the return objective is framed in terms of beating the rate of inflation by a certain margin, for example, for a growth fund, 3 to 4% (after investment fees and tax) over rolling five year periods. The risk objective is commonly expressed as the chance of a negative return in any one year. A typical objective will be to deliver (a negative return) no more frequently than one in every 5 or 6 years on average.

“If we look at the median performance over 15 financial years, we can see that funds have achieved those objectives. The annualised return over that period was 7.1%. The annual CPI increase over the period was 2.6%, so the outperformance averaged 4.5% per annum. And there were three negative years out of 15, which averages one year in five, so the risk objective was also met.”

Chant observes that this past decade is unusual because it includes: “two major market meltdowns, one being the ‘tech wreck’ and the other the result of the GFC. When we talk about objectives like ‘a negative return once in every 5 years’, it’s important to remember that we’re talking averages, not a regular occurrence. That’s why you should really look back as far as you can to see the long-term picture.”

Let’s look at the long-term picture

Although Chant West’s comments regarding 15-year returns may be valid, the long-term returns over 10 years are not so rosy. At the risk of depressing our SuperGuide readers, the Chant West table below shows the June 2010 value of a $50,000 investment in the median Growth and Conservative categories over various time horizons. Over the 5 and 10-year periods, investors would have been better off with a lower risk, conservative option. Note that the 10-year period included two major market meltdowns.

Over the 15-year period, a growth option does produce a higher return, according to Chant West. A $50,000 investment has grown to $140,000, which is $17,000 more than if it had been invested in a conservative option.

Source: Chant West media release, 22 July 2010 (www.chantwest.com.au)

Related posts:

1. Super funds deliver 4.7% for 2010 calendar year
2. Super funds deliver 9.2% for 12 months (2010/2011 year)
3. Retail funds outperform industry funds in 2009/2010

While state and federal governments were throwing virtually unconditional cash at first home-buyers in the form of grants and bonuses, the First Home Savers Account (FHSA) required you to wait four years before you could a buy a house. If you chose not to wait, then your hard-saved cash in your FHSA was redirected to your superannuation savings rather than your mortgage.

Despite the otherwise generous nature of the FHSA (I explain the details later in the article), the risk of losing access to your money until you retired was a risk many young people were not willing to take. From a standing start in October 2008, the scheme was intended to accumulate billions in savings for first-home buyers but such an outcome never eventuated — total account balances are dwindling at less than $80 million.

In defence of the FHSA, the commencement of the scheme did coincide with the Global Financial Crisis, accompanied by a rapid drop in interest rates and a rash of grants and bonuses by state and federal government triggering a rush to buy and build first homes.

Waiting four years for what the FHSA had to offer — some tax-free investment earnings, and a few hundred dollars each year in tax-free money — didn’t seem as compelling as: a temporary drop in house prices (improving affordability), record-low interest rates and tens of thousands of dollars in free cash right now.

Removing the four-year restriction is better

In the May 2010 Federal Budget, the Government announced that where an individual buys a house before the four years is up, the money accumulating in the FHSA can be paid into the individual’s mortgage (that is, an approved mortgage) after the four years has passed, rather than redirecting the savings to the individual’s super account. This change in the rules will not apply to houses purchased before the changes become law.

I believe the modification to the rules remains a deterrent for many first-home buyers who may not want to lock their savings away for four years (even with the cash bonuses associated with the FHSA), when those savings could be put towards a deposit in, say, a year’s time.

Confused? I’ve read the material on the FHSA scheme several times and it still gives me a headache, but if you’re willing to follow the rules, the FHSA is a helping hand for you, your children or your grandchildren in pursuing the Australian dream of a first home.

How does the FHSA work?

At the bottom of this article, I provide you with a list of useful links explaining the FHSA, although the main features of the scheme are listed below:

• Special account. You can open a FHSA within selected superannuation funds, and via special bank accounts. Another problem with the scheme is that not many super funds or financial organisations offer FHSAs.
• Must be over 18 and under 65.
• You must have never lived in a home that you own. You can own an investment property, subject to not having lived in the property.
• Minimum $1000 after-tax contribution. You (or one of your family members if they want to help you out) must deposit at least $1,000 per year into the account in at least four financial years (they don’t have to be consecutive years) before you can access the funds for the purpose of buying a home. I understand there may be slight changes to this requirement. Note that this contribution does not count towards your superannuation contribution caps.
• Lifetime maximum of $75,000. The maximum that can be contributed to the account over the lifetime of the account is $75,000. Note that this account balance cap also includes fund earnings and the government contributions – what a con!
• A 17% tax-free contribution. For every dollar that you contribute, the Government will make a tax-free 17% co-contribution. For example, if you contribute $1,000 to your FHSA, then the Government contributes $170 (17%) — an immediate return of 17% plus earnings on your savings balance. The co-contribution can be as much as $850 a year, if you chose to make an after-tax contribution of $5,000. Note that this co-contribution is a different scheme to the superannuation co-contribution scheme.
• Concessional tax rate of 15%. The tax rate on earnings derived from the FHSA is 15% which is attractive if you’re paying more than 15 cents in the dollar, but not so attractive if you pay less than 15% income tax on your personal income.
• Tax-free withdrawals. Unlike your super account, you don’t pay tax on the amount that you withdraw from your FHSA when withdrawing cash before you turn 60.
• Not available via SMSFs. You cannot over such an account within a self-managed super fund.
• Unlikely to be invested in long-term assets. Since the cash can be withdrawn within four years, the savings are unlikely to be invested in long-term growth assets, which means that investment returns may not necessarily be that high. I understand that most FHSAs on offer are invested in cash.

Where to go for more information

The ATO is administering the FHSA scheme, and the ATO website has lots of information about FHSAs. The main ATO links are:

• First home saver accounts – what you need to know
• First home saver accounts – what to do/read next

Related posts:

1. THE SOAPBOX: Sneaky sneaky – no indexation in co-contribution income threshold for 2 years
2. Accessing super to buy property: part one
3. Find lost super in 4 steps, and make quick cash

Trish’s response: Before I answer your question about options, I need to clarify your comments about contracts for difference (CFD). In certain circumstances, the Australian Tax Office has indicated that CFDs are allowable investments for self-managed super funds (SMSFs), provided that cash is used as collateral for any margin payments on the contract, rather than using fund assets as collateral. Now, in my view, cash is a fund asset, and I’m surprised that the ATO has taken this view on CFDs but there you have it, although I would be closely following the ATO’s views if any SMSF trustee is considering using CFDs within his or her fund. (If you want to read more about the ATO’s view on SMSFs and CFDs, check out the ATO website).

In response to your question on options: Derivatives, such as options, are allowable investments for a SMSF, subject to certain conditions, including:

• ensuring that the fund’s investment strategy (and trust deed) permits the SMSF to purchase options and
• the fund has a derivative risk statement, that is a statement that explains the SMSF’s risk management policies when using derivatives.

For the most part, options are used as a hedging tool to minimise the volatility in an investment portfolio, although some investors use options as a pure trading tool for profit. Any SMSF trustee considering using options within a SMSF portfolio needs to confirm the use of such instruments with the ATO and/or with the fund’s adviser.

Note: Anyone considering derivatives within a super fund should also read Regulation 13.15A of the Superannuation Industry (Supervision) Regulations 1994, for some background on the use of collateral and derivatives.

Related posts:

1. SMSF basics: Can my DIY super fund borrow money?
2. SMSF investment: Buying commercial property, and borrowing options
3. SMSFs: Taking lump sums from accumulation account