SMSF investors failing to beat market
Most self-managed superannuation funds (SMSFs) do not outperform indices, meaning most are better off investing in index funds, according to research from the Monash Centre for Financial Studies (MCFS).
The report, ‘Is there wisdom within the crowd’ was conducted in collaboration with SelfWealth and co-author Dr Nga Pham said the results did not paint a rosy picture.
“Overall, when we analysed this whole SMSF investor community in the database, we found that on average SMSF investors did not beat the market,” Pham said.
“We created an index to represent the performance of the SMSFs in the sample. To put it in dollar terms, $1 invested in the S&P/ASX200 from mid-2012 would give you almost $2.50 up until the peak before the COVID-plunge in March 2020.
“The performance of SMSFs was worse than that. $1 invested in 2012 would become only less than $2.20 just before the pandemic.”
Pham said SMSFs had lower volatility than the broad market index during the years examined but still had lower risk-adjusted returns.
“Basically, it just means that for most of these SMFSs, they would have been better off investing in an index fund that gives them broad exposure to the Australian market than managing their own portfolios,” Pham said.
In the research, Pham said portfolios with at least 20 stocks were put into four groups based on size, with the largest group having assets of more than $1.65 million while the smallest group had less than $400,000.
“We find that large funds performed better than small funds during the first period of our analysis,” Pham said.
“In the subsequent period that includes the pandemic time, the performance of the groups were relatively similar.
“However, the performance persistence of large funds over the whole study period was better than small funds.”
Co-author Dr Bei Cui said most SMSFs in the study failed to keep up with the market, but there was persistence among the best SMSF performers in the community.
“It suggests that there was some level of wisdom within the crowd among the top performers and in that spirit we developed an approach to use historical performance indicators to identify past outperformers.
“Our expectation was that these portfolios would continue to do well in the future. We have back-tested various risk and performance indicators to pick up the top performers each year and indeed we saw that these top performers still performed well in the following year, which validated our conjecture.”
The SelfWealth database allowed the researchers to examine the daily trading behaviour of more than 60,000 SMSF investors with their Australian equities portfolios.
“Our analysis started with over 27,000 portfolios with a total value of $12 billion in 2012,” Pham said.
“Our sample expanded to more than 43,000 portfolios as of mid-2020, right after the March COVID panic of the market with the total value of over $25 billion.
“On average, the value of the portfolios increased from around $470,000 in 2012 to about $730,000 in 2020.
“The median value was just half of the mean values. This means that the average values of the portfolios were driven by some very large SMSFs in the sample, the multi-million dollars of assets.
“Some portfolios were quite large – the largest one in the database held almost $390 million of Australian financial instruments in 2020.”
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