Despite their inherent advantages, large corporate, retail and industry super funds are being left for dead by self-managed super funds (SMSFs).
Access to cheaper trading, investment banking analysts and company management, teams of highly-qualified research analysts, inside running on discounted placements and access to a host of investments many SMSFs simply can't access, would suggest that large super funds should outperform their smaller brethren consistently and on a regular basis.
But it's simply not the case.
Long maligned by everyone with a vested interested in seeing the popularity of SMSFs decline, SMSFs are proving their worth, and then some.
Over the previous 7 years to June 2013, official figures from the Australian Tax Office (ATO) show that SMSFs have outperformed their larger competitors with an average return of 4.33% compared to 3.69% for the large super funds. Those returns are low but do include the global financial crisis and two consecutive years of losses.
According to the Australian Financial Review (AFR), a closer look at the data shows that SMSFs tend to outperform when markets do poorly and underperform during bull markets. And there's a reason for that.
It seems SMSFs higher cash weighting, exposure to large Australian blue-chip companies and property have helped them outperform. The AFR also suggests one reason is that the self-employed, professionals, small business people and primary producers typically run many SMSFs. They are skilled in making tough decisions and transfer this skill to their SMSF. Additionally, it seems the larger an SMSF, the better it outperforms, posting lower losses and higher gains compared to very small SMSFs.
It could also be that most large super funds underperform SMSFs because they are overseen by analysts and managers with 'no skin in the game', where average performance is rewarded and diverging from the 'crowd' is not. Perhaps the results would be different if the fund managers were required to hold their super in their own fund?
Despite the apparent advantages large super funds have over SMSFs, the smaller funds do have many advantages of their own:
- They aren't required to disclose their performance every three months, and can instead focus on the long-term.
- Large super funds tend to see their funds under management (FUM) flow out when markets are performing poorly and are forced to sell at market lows, while FUM tends to gush in when markets are toppy.
- SMSFs have no need to report performance against a specific benchmark – and, therefore, no need to 'hug an index'. Don't want to hold resource stocks? For SMSFs, that's perfectly reasonable – for a large super fund – problematic.
- SMSFs are several steps removed from the market. It's a bit like Warren Buffett preferring to ply his trade from Omaha, Nebraska, more than 1,200 miles (2,000 kilometres) away from Wall Street. It makes it easier to tune out the market 'noise'.
- Utilising ultra-low fee exchange-traded funds (ETFs) and listed investment companies (LICs), and minimising trading, SMSFs can reduce their administration and management fees to miniscule amounts. Large super funds, on the other hand, can charge as much as 2% management fees, significantly affecting member's returns over the long-term.
- Unbiased advice from the Motley Fool Australia. Ok, I'm biased, but all of our subscription services are handsomely beating the market.
Foolish takeaway
No wonder SMSFs have proven so popular. The super fund industry has been forced to adapt to a new world order, providing more options for their members, such as direct investment into shares. But will it be enough to stem the tide of Australians setting up their own SMSFs? Not if SMSFs continue to outperform them – which appears likely.
