A day to celebrate, June 27 2009. The day our Self Managed Super Fund, SMSF, showed a profit, if only for the assets purchased based on my own analysis. Naturally I’m only publishing our SMSF performance table here as it is flattering to my stock picking ability, though sadly it is less than flattering to my newsletter or managed fund picking and timing ability.

Bragging rights aside, there is a point to this post, a lesson I hope to convey. Though before I get there I should set the record somewhat straighter than the skewed performance shows in the above table.

I setup and started investing in our SMSF in April 2005. The initial four purchases were my own analysis and at the time they underperformed the market. I then decided that I would leave the stock picking to others and concentrate my efforts on the bulk of our assets which sat outside our SMSF and were predominately in the US equity market.

The managed fund has not performed as badly as the figures indicate. We transferred into our SMSF a large chunk of the managed fund near the peak of the market. The reasons for this were complex, but fundamentally it was to allow us to continue to drip into the managed fund via our SMSF.

My picks based on a newsletter’s recommendations have performed poorly, or perhaps atrociously would be the best adverb. The reasons for this are simple. They are someone else’s picks which I knew little about. As I never invested in the time in getting to know them I was at the mercy of the newsletter writers. That is one of the main lessons self directed investor should consider. If you’re a self directed investor you must do your own work. By all means use newsletters as a source, but do your own research.  As it happened I decided the newsletter was not worth $600 a year so I cancelled. I then had these companies, which I knew little about, sitting in my portfolio. I should have sold right away, but alas did not.

In January 2009 I stopped dripping into the managed fund and took over complete control of all direct investments. I did this after a review of the performance of the fund versus my own performance and was surprised by my out performance. While I expect my market timing to aid my out performance my analysis was solely on long stock positions versus the managed fund. I was surprised my stock picking was outperforming. As the fund charges high fees I decided it was time to take control of new cash inflows. The other influencing factor was my partner had been maxing out her salary sacrifice into super for a couple years so the pot had grown large enough to interest me.

Isn’t a -25.3% Return Over Four Years Terrible

It certainly would be, but that is not the return of our SMSF, it is the average return of equity positions over that time, excluding dividends, distributions and interest. Remember what we’re celebrating, my stock picking performance of 0.6%. 

Consider the following chart

Our first purchase was April 20 2005, the Australian All Ordinaries closed that day at 4002. On June 27th it closed at 3690 or 7.8% lower. Still not looking good comparatively, but our SMSF’s inflows were large during 2007 and 2008 . The monthly average of the AORD over that time frame was 5,622, so average investments over that time frame would be 34.4% lower. 

Then consider, -25.3% is the equity component and we held a large cash balance earning good interest and our largest investment was in a high dividend paying company. The upshot is we did alright and would possibly have done better if I had not made poor decisions to defer our Australian investments to others.

In fairness to the managed fund, it’s returns are handicapped by my decision. In August 2007 I decided the Australian market was overheated and did not wish to invest directly. That is when I transferred the managed fund into our SMSF to enable us to drip into the fund monthly. I knew a correction was coming, but at the same time I did not know when or how large it would be. The mutual fund was my hedge to the upside, if markets kept going up then we continued to get some skin in the game, while the majority of our funds were safe in cash and a high dividend payer. Needless to say things didn’t work out as well as I’d hoped. However, my point is, it is somewhat unfair to compare the performance of the managed fund to my own selections.

Similarly there are probably plenty of reasons why it is unfair to compare the newsletter’s picks to my own. However, I still takeaway the lesson that I must manage my own money. For anyone who has struggled through this unedited brain dump I guess I owe it to you to share our actual performance since inception. I wish it was an absolute good ending, but at least it is a comparatively good ending. Rather than provide time weighted returns or compound annual growth rate I’m going to keep it simple, just on the off chance that my lovely partner reads this. If you take our beginning balance and add all the net inflows then over the last four years our SMSF has lost 2.7%. Diving deeper in search of a good relative feeling; if I exclude the initial large transfer in of the managed fund we had a positive return of 6.1% since inception four years ago.

Writing this has inspired me to do further analysis of our SMSF. I have begun with a comparison to an index fund using data from State Street Global Advisors SPDR S&P/ASX 50 Fund (SFY). My rough first pass of the data indicates we would have lost 4.7% of our funds using an indexing methodology.

While drawing any firm conclusions from any data is generally dubious I think it is fair to say that most individuals would be better off following an indexing path. Although I am not a professional investor I do dedicate a lot of time and energy to investing and have been investing since 1987. Yet, the returns of our SMSF have only slightly outperformed an index approach. I believe the fairest comparison is 6.1% for our SMSF to -4.7% for an index approach.

I am not withdrawing our funds from the managed fund as it is a small cap fund and I believe the managers have a sound investment philosophy and will improve their performance over time. The average price to earnings and price to cash flow of the fund’s holdings is lower than the market averages and being small caps the beta is higher. Since I’ve held on to the fund all the way down and been punished by the high beta now is not the time to abandon ship, as the high beta and lower than market averages will work for us as/when markets move higher.

Related posts:

1. Preparing your own Self Managed Super Fund (SMSF) Tax
2. Self Managed Superannuation Fund (SMSF) Setup
3. A Snapshot into Fund Managers Performance
4. Calculting Fund Performance
5. Fusion Portfolio and SMSF Performance
6. Delving into my Super