How do I benchmark?

Knowledge Test

Knowledge Topics

Over any investment period, if you want to benchmark the performance of your Self-Managed Super Fund (SMSF) your-self, you need to work out 3 things:

  1. Your investment return over the period, using a TimeWeighted Return (TWR) method
  2. Your average asset allocation over the period
  3. How your return compared to other SMSFs or a bench-mark portfolio with a similar asset allocation to you, over the period

Benchmarking does not only apply to investment returns. For example, you may also be interested to work out how much risk you are taking compared to others in your age group or in your phase, or how your fund balance or member balance is tracking compared to others in your age group.

1.    Your investment return

Across the industry there are different methods used to calculate returns, and unfortunately they lead to different results, leading to confusion for investors. It makes it very hard to know how you’re going.
A Money Weighted Return (MWR ), or Internal Rate of Return (IRR), is affected by the size and timing of con-tributions,  withdrawals and pension payments. It is fine to use when looking at your fund in isolation, but not if you want to compare your returns to something.

The Time Weighted Return (TWR) method is least affected by external cash-flows, and for this reason there are Global Investment Performance Standards (GIPS) which state that large funds must report their returns using a TWR method.

Although GIPS does not apply to SMSFs, the same principal applies and a TWR return should be used for fair comparisons.

2.   Your average asset allocation

There are a few factors to consider here:

  • Over the period were you using a target asset allocation (such as 60% Growth /40% Defensive), or not?
  • If so, what was your target asset allocation?
  • Did you change your target asset allocation during the period?
  • Each month, what was your actual asset allocation, ad how did it differ to your target asset allocation?

3.   Comparison to similar funds

Example: Over the past year John had a target asset allocation of 70% Growth assets /30% Defensive, yet his actual asset allocation was 50% Growth /50% Defensive. He should compare against other SMSFs with 70% Growth / 30% Defensive, because this is what he was aiming to do.

The fact that he was under-weight Growth assets will be one reason for any out-performance or under-performance.

 

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2017-12-18T22:31:29+00:00