The toughest task trustees say they face in running their SMSF is choosing investments, according to the March 2016 Investment Trends Self Managed Super Fund Investor report. The information is based on a survey of more than 3,500 SMSF trustees.
The difficulty is partly because choosing individual shares and accessing other asset classes requires research, planning and sometimes higher levels of funding to provide the diversity you want and perhaps need.
The survey showed 43% of SMSF trustees were finding it difficult to choose investments because of increased volatility, less certainty on dividend yields from large-cap Australian equities and low interest rates and investment returns.
It found that on average, 38% of their portfolios were made up of direct shares this year, down from 45% in 2013.
Reasons to use a managed fund
- To diversify to manage portfolio risk
- To access expert fund managers
- Ease of reinvesting to bring compound returns
Managed funds are increasingly being used by SMSFs to provide an avenue to asset classes that have traditionally been difficult to access.
As a proportion of total SMSF assets, the Investment Trends report found managed funds has risen from 7% of SMSF assets in 2013 to 10% in 2016. In terms of dollars, this has grown from $32bn in 2013 to $60bn in 2016.
What is a managed fund?
In a managed fund, your money is pooled with other investors and an investment manager buys and sells assets on behalf of your SMSF.
Any income or distributions are paid to the fund and the value of the investment increases or decreases depending on what assets the managed fund holds.
Benefits to an SMSF
A managed fund can give your SMSF a way of investing in a more diverse range of assets, sometimes with just a relatively small amount of cash.
Your SMSF can make regular contributions to the investment amount and the fund manager will generally provide comprehensive tax reporting, making administration of your SMSF investment easier.
Perhaps the main reason for using a managed fund is that the fund manager has expertise and experience in managing specialist investment strategies or investing in certain asset classes that a trustee does not have.
What are the risks to consider?
One of the biggest issues to consider is the control you have over the investments in your SMSF.
When you engage a fund manager to manage some or all of your SMSF, the selection of underlying assets is done by the manager, while you retain control over the selection of the manager and the managed fund, so you need to be comfortable relinquishing this responsibility to the fund manager.
Fund managers provide these services for a fee and your investment return is net of this fee, or what is left after the fee is taken.
Also, depending on the fund and its underlying assets, there might be limitations on when you can make withdrawals and there may be costs involved or tax implications in changing from one fund to another.
Active vs. passive management
Managed funds are available across a wide variety of asset classes, strategies and investment ‘styles’.
One important distinction is between active and passive management.
An actively managed index fund aims to outperform a benchmark or index, such as the S&P/ASX 200.
A more passive approach to investing can come with an index fund that aims to achieve returns in line with a market index.
Some funds can specialise in just one asset class, such as shares or fixed income, or they might focus on a single sector, such as industrial stocks or Australian mid-cap shares.
Other funds can be more diversified and invest across a range of asset classes, such as cash, shares, property and fixed income, and these are more likely to carry a more varied choice of risk level for you to consider.
By comparing the asset allocations, the risk profile and the potential performance, you can make an informed decision about whether a managed fund might be a consideration for your SMSF.