Self-managed super funds are kicking fund manager butt

If you ever needed yet another reason to start your own self-managed super fund (SMSF) – here it is.

According to Rice Warner, SMSFs have outperformed the rest of the superannuation industry in six out of eight years from 2005 to 2012. The average annual return for SMSFs (net of fees) was 6.8%, compared to 4.1% for the rest of superannuation.

The notion that fund managers have an advantage over retail investors has been kicked to the curb, after being runover by the SMSF train. As the Australian Financial Review (AFR) says, “it shouldn’t even be a fair fight, given the great resources available to professional managers“, such as access they get to company management, cheaper brokerage rates, access to a wide range of investment bank research as well as discounted placements of shares.

According to the latest data from the Australian Tax Office (ATO) there are now more than 1 million SMSF members, with nearly $560 million in net assets. That’s the largest segment of Australia’s superannuation system and is growing rapidly.

When 70% of fund managers, on average, fail to even beat the index, you can see why Australians are taking matters into their own hands. But perhaps the biggest reason why SMSFs are thrashing the professionals is the long-term focus most SMSFs are taking.

The ATO doesn’t allow SMSFs to be treated as ‘professional traders’, and trading profits are treated as capital gains, while losses can only be offset against capital gains. That rule may limit the benefits (if any) of actively or ‘day’ trading within an SMSF.

Another factor is that most SMSF investors take a ‘hands on’ approach to investing and controlling costs, meaning less trading, educating themselves and making use of professional expertise such as services like The Motley Fool to outperform the market.

After all, Corporate Travel Management Ltd (ASX: CTD) is up a massive 184% in less than two years, and Seek Limited (ASX: SEK) up 147% since being recommended to Motley Fool Share Advisor members, and that’s just two of the market beating stocks on our scorecard.

And with dividends representing a significant portion of returns, it seems the SMSF focus on blue-chip, high yielding dividend stocks such as Telstra Corporation Ltd (ASX: TLS) and Insurance Australia Group (ASX: IAG) is paying off.

If you want to setup your own self-managed super fund, the ATO is one of the first places you should visit, with plenty of useful information.

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Motley Fool writer/analyst Mike King owns shares in Telstra and Seek. You can follow Mike on Twitter @TMFKinga

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