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The debate about who wins the battle between SMSFs and APRA-regulated super funds is one that has emerged in recent years with the rapid increase in new SMSFs which is growing at around 14% per year.
So which of these two retirement income investment vehicles delivers the better investment returns, and why can one perform better than the other?
One would think that in this modern day of advanced data gathering there would be a definitive answer but unfortunately the answer is not that clear cut. This is mainly down to the fact there are two organisations (the ATO and APRA) collecting and publishing statistics on SMSFs and other super funds, and each uses different methods of measuring returns. The ATO measures ROA (Return on Assets), APRA measures ROR (Rate of Return), and they can produce quite different results. We’ll get to the difference between the two later in the article.
On average, SMSFs have delivered annual returns, minus fees and taxes, of around 5.7% in the decade to 2016 compared to 5.3% for APRA-regulated super funds over the same period.
So SMSFs win the first battle on points but when you dig down through the data, there are some interesting sub-plots which provide a better insight into this SMSFs vs super funds debate.
It could be reasoned that the difference in performance could be driven by superior investment performance by SMSFs within asset classes, by differences in the underlying asset allocation between the segments, or by differences in how returns data are collected and reported by the ATO and APRA.
The most recent ATO available only covers to 2016. The table below shows the return on assets (ROA) of SMSFs by asset size. The ROA is calculated by determining the net earnings, and comparing this to average assets during the financial year to determine the percentage return on assets.
Average ROA, by fund size, by year
|
Fund size |
2012 |
2013 |
2014 |
2015 |
2016 |
|---|---|---|---|---|---|
|
$1 – $50k |
-18.73% |
-17.28% |
-12.51% |
-17.38% |
-16.70% |
|
>$50k – $100k |
-9.93% |
-5.17% |
-2.78% |
-6.84% |
-7.28% |
|
>$100k – $200k |
-5.90% |
0.83% |
1.55% |
-1.02% |
-3.28% |
|
>$200k – $500k |
-2.52% |
6.36% |
5.88% |
2.45% |
-0.02% |
|
>$500k – $1m |
-0.41% |
9.31% |
8.33% |
4.60% |
1.37% |
|
>$1m – $2m |
0.67% |
10.64% |
9.59% |
5.70% |
2.15% |
|
>$2m |
1.49% |
11.59% |
11.29% |
7.52% |
4.27% |
Source: ATO
This provides an interesting snapshot which suggests that the bigger the fund size, the better the return. But this ROA is different to the way APRA measures performance which is ROR, or rate of return.
Class, an SMSF administration software company, produced its own SMSF Benchmark Report in September 2018 which questioned the Productivity Commission’s (PC) methodology in measuring investment returns.
Source: Class
Note: APRA ROA and ROR figures, and the SMSF ROA figure are drawn from the Productivity Commission draft report and associated Technical Supplement. The SMSF ROR return was calculated by Class using publicly available ATO data.
The basic findings from that report is that Class maintains the PC underestimates SMSF returns because when it compared the performance of SMSFs to APRA-regulated funds, inconsistent formulae were applied.
So how does the ROA formula differ from the ROR formula?
The ATO Return on Assets (ROA) formula is conservative and always shows a worse result than the APRA Rate of Return (ROR) formula. The ATO treats contributions tax and insurance as expenses but APRA does not. The smaller the member balance, the higher the impact of the extra expenses.
In October 2018, The PC acknowledged these discrepancies, which were raised by Class and the SMSF Association, when it released its report titled “Investment Performance: Supplementary Analysis”. This analysis acknowledges the submissions from both Class and the SMSF Association, and considers the impact the APRA vs ATO formulae has on SMSF performance results.
“With the assistance of additional data provided by the ATO and Class Limited, the Commission confirmed this to be the case, with the aggregate impact on reported SMSF returns in the order of 1 percentage point a year. While full comparability of returns calculations remains elusive, the Commission has attempted to reduce the disparity by applying a simple adjustment to SMSF return data to make them more comparable with APRA return data”, the PC report conceded.
Basically what it all means is that as a whole, as mentioned above, the SMSF segment delivered slightly higher annual returns compared with APRA-regulated super funds (5.7% v 5.3%).
When broken down further, that broad assessment remains true, it needs to be noted that larger SMSFs have outperformed the APRA-regulated segment. However, many smaller SMSFs, with balances under $500,000, or about 42% of the segment, have produced lower investment returns than larger SMSFs.
Annualised adjusted net returns, 2012–2016
Source: Productivity Commission analysis of PC analysis of ATO data on SMSFs.
The above graph factored in an adjusted formula, as suggested by Class and the SMSF Association, and “new” SMSFs were defined as those which were established within the past two years.
