Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
SMSF operating costs get a reality check
Clients who have put off establishing a self-managed super fund due to the assumed high costs may be put at ease after the Australian Taxation Office released the median cost of an SMSF which is significantly lower than earlier reported figures.
The ATO’s 2017-18 Statistical Overview of SMSFs shows the median operating expense of SMSFs is $3923 a year and the average at $6152.
This is dramatically different from the Australian Securities and Investments Commission recent fact sheet outlining the average expense of an SMSF as $13,900.
SMSF Association chief executive John Maroney says the SMSFA believes the fact sheet was well intended to help people consider whether an SMSF was a suitable choice for them but lacked balance and would have benefited from more context about optional expense components.
“We welcome this latest data from the ATO on operating expenses as it reflects a far more realistic assessment of what it costs to operate an SMSF,” he says.
Despite this, the ATO’s figures reveal the average total expenses $14,879 while the median is $7710.
“Previous analysis relied on the use of averages that ignored the significant distortions caused by large SMSFs and funds choosing to use borrowings and buy extensive administrative, insurance and investment services.
“High total average expense figures have not reflected the reality of the typical SMSF, and we acknowledge the ATO’s willingness to listen to our concerns and to present the data in a more transparent and meaningful way,” Maroney says.
The ATO overview breaks down the expenses by SMSF asset range and the operating expenses to include auditor fees, management and administration expenses and the SMSF supervisory levy.
The data shows that the SMSFs that exceed $2 million have an impact on the operating expenses in the average cost. It also includes a number of optional expenses an SMSF could incur such as insurance premiums and interest expenses that are not operational.
“The data allows us to take a fund with a typical establishment balance of between $200,000 to $500,000 and, if we only include the basic operating expenses, we can estimate the median operating expense to be around $3,400 for these SMSFs,” Maroney says.
There are 1.125 million Australians in nearly 600,000 SMSFs with an average fund balance of $1.3 million and a median fund balance of $720,000.
The tax office’s data reveals the average investment return is sitting at 7.5 per cent, compared to 8.5 for an APRA regulated fund.
