SMSFs out perform rivals including big super funds and become a tax target for Albanese government

Self Managed Super Funds run their money more successfully than big super funds, but the timing of this success could mean heavier taxes from the Albanese government.

Tim Toohey of Yarra Capital Management says SMSFs achieve better returns than professional investors. Picture: Paul Jeffers

What a shame Treasurer Jim Chalmers is setting up to squeeze Self Managed Super Funds with a new super tax, just as they are knocking it out of the park when it comes to investment returns.

There are more than one million investors involved in SMSFs and it’s not just that they run their own money – ensuring they will never need to tap the wider public for an aged pension – they do it better than big super funds.

Yes, you read that correctly. SMSFs are bringing home considerably better returns than the nation’s biggest super funds.

You might have thought that all the negative headlines about SMSFs holding too much cash or ignoring overseas markets meant that sooner or later the big super funds, with their enormous resources, would have cemented a competitive edge in the market.

This is not how it is working out at all. Big super funds are slowing down as their members begin to move towards pension age.

Just look at the returns this year from the champion of the sector Australian Super. It managed just 9.5 per cent over the year to June while the median for the wider super sector was 10.1 per cent.

In contrast, many SMSFs will be returning figures of 13 per cent or more for the financial year to the end of June.

Until very recently, when figures were published purporting to show how SMSF investors were as good as the professionals, the numbers were invariably commissioned by an organisation which would benefit from highlighting such outcomes.

But more recently, something much more persuasive has emerged from the desk of Tim Toohey, a veteran economist who has a history of issuing important reports in the middle of important debates.

With the new super tax on unrealised gains signalling the government is taking aim squarely at SMSFs, Toohey – who is currently head of macro and strategy at fund manager Yarra Capital Management – took it upon himself to do a deep dive on SMSFs.

The results are a revelation.

In what he describes as “a remarkable data point”, his survey discovered that over the last three years the SMSF sector achieved a growth in net assets of 34 per cent compared to a 20 per cent return for Big Super – a 14 per cent difference investment returns over a period of just three years!

Toohey dug deeper into the numbers to find out why SMSFs have “achieved comparable or superior asset growth compared to larger professionally managed super funds, despite their more conservative investment strategies”.

He finds that SMSF success turns on two points – asset allocation and smart tax strategies.

SMSFs may have more in cash than professional investors and they may have more invested onshore than offshore, but clearly they make less mistakes than the big funds.

Moreover, their aversion to so-called unlisted assets has not hurt them one bit.

In fact, on the core discipline of asset allocation, SMSFs do better than the big funds. On this sole metric they managed 23 per cent returns versus 20 per cent returns at big super funds.

But the extra factor that brings home significantly better overall investment returns of 34 per cent versus 20 per cent at big super is tax.

Toohey found the heavy reliance on Australian stocks by SMSFs has nothing to do with being unaware of the wonders of Wall Street – rather it has to do with the powerful returns that can be linked with franked dividends in a blue chip domestic share portfolio.

The older age cohort inside SMSFs compared to big super then explains enhanced returns linked with franked dividends because the retirees with SMSFs get a better bang for their buck from the dividend imputation scheme. (Franked dividends are most beneficial to those on lower tax bands – the majority of retirees with SMSFs operate inside the tax- free band which is capped at $2m).

Toohey also says that the ability to get money directly into property and to take out mortgages through SMSFs offers strategies not available to big super funds.

Ironically, the banks have largely withdrawn from financing the SMSF sector, making property loans inside super among the most expensive in the market.

Similarly, Toohey says investing in start-ups offers tax advantages for SMSFs which “provide another avenue to minimise tax during the accumulation phase that is not possible for large super to access at scale”.

Putting it all together, Toohey concludes that SMSF investors are just as capable as the professionals, and on top of that they are smart when it comes to tax.

That’s not to say the SMSF system is perfect: There are investors at one end of the system where the SMSF regime has let them down badly – such as the 6000 investors now stuck in the debacle linked to First Guardian.

At the other end there are a few hundred operators who controversially run enormous amounts of money inside the protection of SMSFs.

Both these groups create stresses on the sector, but that should not be allowed to undermine the wider success of everyday investors who, when left to run their own money, do so very successfully.

Unfortunately, as the government’s extraordinary move to tax unrealised gains takes shape, it also means SMSFs are a big fat tax target.