SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
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How should you measure your SMSF performance?
Most mutual funds measure their performance against a market index and I know some Self Managed Super Funds (SMSF) do the same. Each public fund has an investment strategy which is outlined in their product disclosure statement (PDS) and it cannot be changed by the fund manager without the approval of the members of the fund. If a funds investment strategy includes maintaining 70% or more of their fund in Australian equities, then it makes a lot of sense to benchmark themselves against an index like the ASX 200 index.
Our SMSF has a performance target of 5% above inflation and that is what I try to meet and exceed each year. This target was set based on
- the level of risk we were prepared to take and
- the types of investment strategies we use
We do not benchmark ourselves against any stock market indexes because if our benchmark index’s performance is -20% in a year, I am not going be happy if I achieve -15% for that year, even though I have outperformed my benchmark. I would prefer a small positive or even zero return compared to losing money. However, this is only possible if your SMSF is not constrained to having a fixed percentage of your funds to be invested in stocks at all times. Our asset allocation is quite dynamic. If I believe that there is too much risk in staying in the stock market, I choose to stay out of it. Unlike large public funds with thousands of members, it is very easy for a SMSF to change the funds investment strategy as there are only four or less members involved. This is one of the key advantages of having your own SMSF.
Our investment strategy has evolved a lot in the past three years. We started off with a long Australian equities only strategy in 2007. When the Australian market started to show weakness, we moved everything to cash for a few months as interest rates were still pretty good at around 8%. When the government started to cut interest rates, we moved slowly back to equities and tried diversifying into other asset classes like gold and international shares. We also started using options to hedge our stocks and to generate extra income. When we saw that diversification was not really working as all our asset classes were moving in tandem, we started to look for investments that could profit in a falling market like short or inverse Exchange Traded Funds. Looking at our current investment strategy, our SMSF looks more like a hedge fund rather than your typical super fund. Our current asset allocation is:
I have been expecting a major correction in shares and commodities so I have been slowly cashing out these investments since October 2009. The only shares we now have are in defensive sectors (e.g. telcos and health care). I am also bullish on the US dollar so I have been moving more funds into our US brokerage account since late last year. Some of the USD funds are invested in short ETFs which are only available on the US markets. With our current asset allocation, I am sleeping very well at night. I don’t think I would be able to sleep as well if we were 70% allocated to equities, especially if there is more market action like today’s (268 point drop in the DOW and 111 point drop in the All Ordinaries index) to come.
Right now, I feel pretty confident I can meet our performance target return for FY 2010. If the USD and market moves in the direction I am expecting, maybe we can even exceed the target. I don’t like to count my chickens so I will wait until June 30 before I give another update on our performance.
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How did you make this template? I got a blog as well and my template looks kinda bad so people don’t stay on my blog very long :/.
“We do not benchmark ourselves against any stock market indexes because if our benchmark index’s performance is -20% in a year, I am not going be happy if I achieve -15% for that year, ”
Hi Christina, but what about when the market returns 40%? Will you be happy with 10% returns then?
Is an inflation plus 5% returns target high enough for a strategy that exposes itself to foreign currency and shorting stocks?
Keep up the good posts, I find them interesting.
Hi Dean
“what about when the market returns 40%? Will you be happy with 10% returns then? ”
I would still be happy with 10% but happier if I could achieve more of course. If I really believe we are in for a bull market, I would happily allocate more to equities. If I am not convinced in the market rally like the one from Mar 2009 – Jan 2010, I am happy to allocate less to equities and perhaps miss out on better returns.
“Is an inflation plus 5% returns target high enough for a strategy that exposes itself to foreign currency and shorting stocks?”
I don’t think I am taking any more risk than someone who just invests in both Australian and international shares. I do not short stocks as this involves unlimited risk and an SMSF is not allowed to do that. I have allocated 10% of portfolio to inverse ETFs. The worst they can do is go to zero and this is no more risk than buying any stock.
Re foreign currency, I don’t do forex but as our SMSF already invests in the US market (I think of it as our allocation to international shares), I am comfortable with buying more USD especially if I expect it to go up against the AUD. Even if it doesn’t go up, I plan to use it to buy other USD denominated investments. As you now there are so many more investment options in the US markets and than Australian market. Other than USD, I don’t buy other foreign currency just to speculate on exchange rates.
Thanks for your comments and asking the good questions.
Eetkamer,
Sorry I tooks so long to reply coz your comment went to the spam folder and I did not check it for a while. I use WordPress for this blog and the look of a blog is determined by the theme you use. I use the Newpro theme which you can buy from Gabfire Themes. You can find a link to them at the bottom of this screen.
Hi Christina or anyone that can help
Maybe I’ve read the above incorrectly but could you please confirm this for me… Can my SMSF invest in Forex via a MetaTrader Platform and if so is their a % limit of how much can be invested in that way?
Thanks, Steve
Sorry Steve, I don’t trade Forex so I cannot really confirm what you are asking. The basic rule is you cannot create a charge over your fund which rules out things like margin lending and short selling. Maybe others who know more about Forex can help.