At some point or another all investors begin to plan for their retirement. Self-managed super funds have become the vehicle of choice for some investors to achieve their retirement goals. And many are using their SMSF to purchase property. Is this good strategy? Looking at the Australian Government’s very own SMSF, the Future Fund, can help answer this question.
Recently Australia’s Future Fund reported their March 2015 balance. It came in at $117 billion, a $56.5b improvement from the initial seed funding of $60.5b in 2006. The Fund has a long term return benchmark of CPI+4.5%, and the stated aim to hold $140b by 2020. The Fund struggled to meet its target return in the early years, primarily due the state of the financial markets around the GFC.
However in recent years it has achieved returns between 10% and 14%, more recently reporting a 15.1% return financial year to date. This has beaten the industry super fund average of 11.1%. Where did this all begin, and can sophisticated investors replicate these results?
“I remember when…”
Cast your mind back to 2006.
Australia was at capacity. In the midst of a commodities boom, the Australian economy was expanding by 3.2% p.a, inflation of 4% was reflecting the active economy, the official cash rate was rising to 6%, and the unemployment rate was around 4.9%.
Australia was working so hard, that we were receiving more than we were spending, ie creating a surplus of cash. Then Federal Treasurer Peter Costello, decided it would be prudent to bank some of these savings and create a Future Fund – a Sovereign Wealth fund to cover the unfunded superannuation liabilities of the Australian Public Service. Surplus money from the Federal Government (up until 2008) as well as around a third of the proceeds from the Government’s sale of Telstra provided the seed capital.
Creator to Chair
The Fund was established via the Future Fund Act 2006, and some of the rules included that funds could not be withdrawn until 2020, except for the purpose of meeting operating costs, or exceed the target asset level defined by the Act.
The Fund is run at arm’s length from Government, by the Future Fund Board of Guardians. The Guardians are made up of prominent business people with a wealth, banking, and finance background, with a Chair at the helm.
Previous Chairs have included David Murray (2006 – 2012) and David Gonski (2012 – 2014). Peter Costello has come full circle, from creator to now chair the Guardians.
The secret of stellar performance
For almost 30 years, fund managers have recognised finance studies which show that around 90% of a fund’s performance can be attributed to the fundamental decision of which asset classes to invest in. In tech speak, this is asset allocation, and while returns are additive, risk is not, as some assets behave differently to others.
The Future Fund is just another fund manager, not dissimilar to your industry super fund. Like a super fund, the Future Fund has to decide on which mix of assets will deliver the highest return, at the optimum risk level, and invest in those assets accordingly.
The table to the right illustrates the mix of assets that the Future Fund has used to achieve its stella results. This mix means that around half of the Fund’s investments are in equities. The funds are split into the Australian market as well as developed and emerging markets. Some funds were also invested in private equity. (Data is from the 2013/14 report).
This diversified strategy assists the fund in achieving its long term goals of strong returns with protection for the principle.
In the recently released March 31st Portfolio Update; Chair Peter Costello has recognised the “enormous monetary stimulus around the world” and that “asset prices are generally fully priced…overpriced”. Therefore the fund had to make some changes to its investment mix. They are going to invest more in cash (+4%), invest less in debt (-1.3%), infrastructure (-1.4%), developed market equities (-2.3%), as well as less in Australian equities (-1.2%). This is summarised in the chart below.
Given the Fund is investing for the medium to long term, a similar strategy could easily be employed by investors looking to manager their own self-managed super fund.
Never ever ever ever, have your eggs in one basket.*
*Easter eggs excluded.
