Confessions of a self-managed super fund trustee

Confessions of a self-managed super fund trustee

It would seem now is a good time to draw breath, review how the fund has performed and figure out what lessons can be learned from the market upheaval. Chanticleer is happy to admit to being nervous about the future and more than ready to change the asset allocation.

The Chook SMSF was set up about seven years ago for three reasons: to take a more active interest in the management of the family’s retirement savings, to pool the family’s financial assets and, for the first time, to seek professional financial advice.

Seeking professional advice was a smart move. It resulted in the construction of an investment portfolio guided by the following principle – have a long-term strategy of holding good quality companies that generate income through the cycle.

This meant the fund was heavily weighted towards Australian quality companies in technology, infrastructure and healthcare. Also, on the advice of the financial planner the fund was underweight Australian banks and resources. Being underweight banks was particularly smart over the past 12 months.

At the time the fund was established in 2011 theAustralian dollarwas trading at or near parity to the US dollar. The strength of the currency influenced the decision to buy Australian listed shares with significant international earnings.

Markets don’t always go up

The exposure to international markets was enhanced with investments in a handful of international fund managers based in Sydney as well as through index funds. Over the past seven years, the fund’s range of assets has expanded to include US tech stocks and shares in Japan and Germany.

Like most investors, the Chook super fund benefited from the bull market in equities over the past seven years. This is evident from the returns achieved relative to the weighted index benchmark.

It could be argued that the performance of the Chook SMSF over the past seven years shows the benefit of getting involved more heavily in the management of an important pool of family wealth.

While it is true that Media Super and its much bigger rival,AustraliaSuper, would have delivered strong returns over the same period, the graph shows that growth in total assets was greater under the supervision of Chook and a financial planner.

The fees charged by the planner were not that much different to Media Super at about 1 per cent. By partnering with a trusted adviser, the Chook fund trustees were able to obtain wise counsel before making decisions.

The fund avoided being caught in the index fund trap, which would have meant holding a large percentage of domestics equities in the banks. Also, the fund always carried some cash to take advantage of opportunities.

Riding thebull market in equitiesover the past seven years has been exciting and profitable. But 2018 has shown that markets don’t always go up. Virtually no major asset around the globe beat inflation in 2018, according to the annual global strategy analysis by Morgan Stanley.

Chook’s financial planner says markets have reacted harshly to early signs of a global slowdown.

“At this stage the sell-off appears overdone and is factoring in a fall in earnings rather than just a slowing in the pace of earnings,” he said.

“This will all depend on the extent and depth of the downturn in the cycle [which is difficult to predict with any degree of certainty due to the many variables involved]. We haven’t witnessed a market fall of this magnitude since the European sovereign debt crisis. Falls of this nature are always disconcerting but this is when sticking to the long-term strategy of holding good quality companies that generate income through the cycle is important.”

Outlook not bullish

He rejects the idea that an SMSF showing a negative return is guilty of having made fundamental mistakes.

“If you are invested in equities, and equities go down, expect your assets to track that downward path,” he says. “Just because a manager or fund has shown a negative return, it doesn’t mean they have done anything wrong. Rather, it’s the market you have invested in.”

He says that if you have invested in quality assets the price might change but the piece that generally won’t change is the revenue that the assets produce.

“Provided earnings remain robust and the fundamentals remain in place, people can continue to rely on the earnings [and therefore income] flowing through,” he said.

The outlook is not bullish with theHayne royal commissionlikely to maintainnegative sentiment toward the big banksand concerns in the market around the election and what a Labor government might do with negative gearing on property and excess franking credits.

The most significant lesson that Chanticleer has learnt from the recent upheaval in financial markets is the need to have a greater diversity of assets and less reliance on equities.

Over the past two years the fund purchased higher-risk companies involved in funds management, biotechnology and mortgage insurance. Not all of these were a success.

It is clearly time to shift a greater proportion of funds into assets not correlated with equity market returns such as credit, debt, private equity and syndicated loans. Diversification of the fund into alternative assets should help smooth returns in the future.

Chanticleer’s financial planner says alternatives are generally more freely available to private and wholesale investors but it is possible for all investors to achieve diversity through a large retail or industry fund.


Note: The Chook SMSF is managed within the rules of share ownership imposed by theFinancial Review, which prohibit short term trading.

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