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How your SMSF can use managed funds

How your SMSF can use managed funds

You can take control of your retirement investing by setting up a self managed superannuation fund (SMSF), but that doesn’t mean you have to do everything yourself.

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

  1. To diversify to manage portfolio risk
  2. To access expert fund managers
  3. 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.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Past performance is not an indication of future performance. Before you make a decision about your super, you should compare the costs, fees, risks and benefits of super funds and any investment or tax implications that might arise. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia. Commonwealth Financial Planners are representatives of Commonwealth Financial Planning Pty Ltd ABN 65 003 900 169 AFSL 231139 a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 (the Bank). Product Disclosure Statements (PDS) and Information Memoranda (IM) for the funds issued by Colonial First State Investments Limited ABN 98 002 348 352 AFSL 232468 and Colonial First State Managed Infrastructure Limited ABN 13 006 464 428 AFSL 240550 (collectively CFS) are available from Colonial First State Global Asset Management. Investors should consider the relevant PDS or IM before making an investment decision. The Commonwealth Bank of Australia (Bank) and its subsidiaries do not guarantee the performance of the fund or the repayment of capital by the fund. Investments in the fund are not deposits or other liabilities of the Bank or its subsidiaries, and investment-type products are subject to investment risk including loss of income and capital invested. Colonial First State Global Asset Management is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. The commentary provided from external companies that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. While potential SMSF investments have been illustrated within this content they do not represent a comprehensive suite of possible investment products and services within the guidelines pursuant to the SIS Act 1993 with ATO oversight.