There is a great line in one of my favourite movies, The Shawshank Redemption, “Get busy living or get busy dying”.
The context of this line could hold true for self-managed superannuation fund (SMSF) trustees when it comes to managing their own investment strategy. The SMSF structure is really the Rolls-Royce of superannuation funds. It offers members an unlimited choice of investment options, with the legislation being the only limiting factor. However, if you don’t take advantage of the opportunities an SMSF presents, particularly on the investment side, and you effectively leave it in the garage, the additional costs and paperwork will undermine its relevance.
The power of getting active with your SMSF investment strategy lends itself to members who want to take an active interest or role in managing the investments. I often stress this to clients who are considering an SMSF. While you don’t necessarily need to be an investment expert, you should really have some involvement or interest if, for example, you are considering purchasing a property, or some expertise or experience if you are considering trading your own share trades. However, always remember that your SMSF investment strategy doesn’t have a speculation column when it comes to documenting your investment strategy.
How active should you be? There are two moving parts to this question. Firstly, when looking at an SMSF versus alternative superannuation fund options available today, if you are simply holding some managed funds and/or some blue chip ASX shares, you would need to question whether an SMSF is the right option for you. There may well be other important drivers that are underpinning your decision to retain your SMSF structure. However, given the vast improvements in investment choice, and reduction in costs that are now prevalent in the non-SMSF universe, the other drivers would need to be compelling.
For those starting out in the superannuation world and with small balances, I believe it is very difficult to justify an SMSF. Not only are the investment choices reasonable when looking at retail or industry funds, but the fixed costs alone for an SMSF will generally cripple the investment return, no matter how great the outperformance.
For example, if you look at the annual ATO levy for SMSFs, it now costs a SMSF $259 per annum. Not long ago, the ATO levy was $45 per annum. For a $100,000 SMSF, that represents 0.26 per cent per annum in fees. That is not insignificant, especially when compared to alternative superannuation fund fees. In a low- growth environment, paying away 0.26 per cent per annum, particularly on a standard Australian Equities managed fund portfolio, doesn’t make much sense.
The other part to the question is the whole active versus passive debate. We recently saw Morningstar’s annual report into the managed fund industry, with only about a third of actively managed large cap Australian share funds outperforming the S&P/ASX 200 Accumulation Index in the past five years. The picture looks worse when looking at active US Equity fund managers, with only 10 per cent of managers beating the S&P 500 Index.
Whether you fall into the active or passive camp, again it is important to remember that one of the key advantages of using an SMSF is the unlimited investment menu. I would argue that getting active with your SMSF should involve a lot more than selecting an actively managed fund. For the same reason, a portfolio of passive ETFs would really need to be complemented with something else to justify a SMSF, especially when looking at investment opportunities alone.
Don’t be fooled into thinking that an SMSF alone is the silver bullet when it comes to growing your superannuation balance. It is what you do with it that will make the real difference, and investing in investments that are only available in an SMSF world should be one the key motivators.
Ben Smythe, managing director, Smythe Financial Management