How to benchmark your SMSF returns

SMSF benchmarking is the process of comparing the investment performance or returns of one fund, in this case your SMSF, against the investment performance or returns of other super funds, a relevant index or the market.

It can be used to determine just how effective your SMSF investment strategy is and can provide you with relevant information to help in making future investment decisions.

Larger public offer super funds frequently publish returns for each of their investment options, but there is very little information available on the investment performance for SMSFs. Mainly because every SMSF holds its own unique underlying assets and investments.

Key concepts around benchmarking

Before we look at ways to benchmark the investment returns for an SMSF, we first need to understand a few key concepts.

Asset allocation

This refers to the way investments are made or distributed across the different available asset classes, including Australian shares, international shares, property, fixed interest and cash.

The value of the SMSF assets invested in each of these asset classes is then calculated as a percentage (%) of the fund’s total assets.

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Risk vs return and super fund labels

Larger public offer super funds often use terms like Conservative, Defensive, Balanced, Growth or High Growth as a way of describing the underlying investments held in a particular investment option.

These terms are essentially used to indicate the level of risk and potential targeted returns from the funds’ underlying assets.

For instance, a fund labelled as Conservative would aim to invest in lower volatility assets, like cash and fixed interest, and would therefore target investment returns that are more consistent from year to year and lower than other more aggressive funds.

A fund labelled High Growth would aim to invest in assets with higher volatility, like Australian and international shares, and would aim to generate higher rates of return over the long run.

It is worth noting that these labels can be misleading, as there are often significant variances in the actual asset allocation between funds with similar labels.

Super fund managers will determine what they feel is an appropriate asset allocation for each of their investment options. Even though different managers will label their funds the same way, for example, Balanced, they may not be invested in the same way.

The following table shows information taken from the Australian Government website Moneysmart.gov.

In the table above, growth assets refer to shares and property, while non-growth assets (defensive assets) refer to cash and fixed interest.

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When you carry out any form of benchmarking or comparative analysis, it’s important that you look beyond the label and look at the actual underlying asset mix.

Investment returns

To effectively benchmark your SMSF against other funds or indices, you will need to understand how to calculate the investment return for your SMSF.

This is usually done by deducting the opening balance of the fund at the start of the relevant period from the fund’s closing balance at the end of the relevant period. Make sure that you use appropriate and up-to-date market values for the SMSF assets.

Once this has been done, you could choose to deduct any current-year contributions that have been made to ascertain a true return on the funds’ investments.

The difference in the opening versus closing balance can then be used to determine a percentage return for the year; that is, the SMSF investment return or performance, for the period. To do this, simply divide the SMSF’s return by the fund’s opening value.

Whether you include or exclude contributions in your investment return calculation is entirely up to you.

You can then compare the returns achieved by your SMSF with similar funds, indexes or markets. Once again, make sure you compare like with like, based on your SMSF asset allocation.

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Step-by-step guide to benchmarking

The following process can be used to benchmark your SMSF investment returns:

1. Calculate your SMSF return

2. Determine your fund’s asset allocation

• Calculate the value of your SMSF’s assets held in the various asset classes at the end of the period under review.
• You can decide which asset classes to use, but these would commonly be cash, fixed interest, property and shares.
• You can then determine your fund’s asset allocation by dividing the amount held in each asset class by the fund’s total value, which will give you the percentage (%) held in that asset class.

3. Determine the appropriate benchmark for comparison: SMSF vs other funds

• When comparing fund vs fund, compare your SMSF’s asset allocation to the asset allocation used by the other fund. For example, if your SMSF holds 50% of assets in shares and 50% in cash, then choose a fund with a similar asset allocation.
• Don’t rely on labels given to other funds. Use the funds underlying asset allocation to determine what is a fair comparison. As they say, compare apples to apples!
• Consider using the ratings houses’ performance information to benchmark your SMSF to large super funds. Chant West, Canstar, Morningstar and Lonsec (Superatings) compare many of the funds available in the marketplace

4. Determine the appropriate benchmark for comparison: SMSF vs indexes or indices

• You can also use other commonly used benchmarks for individual asset classes for comparative purposes, including:
  • Australian Government Bond Index – for fixed interest investments
  • The All Ordinaries or ASX 200 Index is for funds heavily invested in Australian shares
  • The MSCI World Index for international shares.

5. Make informed decisions

• Once you have reviewed and assessed your SMSF’s performance against like funds or indices, you can then make informed trustee decisions, and these can then be reflected in your SMSF investment strategy.
• Keep in mind that the past performance of any investment is not indicative of any future performance from that investment.

The bottom line

The use of benchmarking and comparative analysis can often assist SMSF trustees in determining if their existing investment strategies and fund investments are appropriate and relevant for their fund’s members.

If carried out regularly, trustees can use the results as a way to measure and monitor their fund returns against appropriate indexes and the overall market and can allow for adjustments to be made if and when relevant.