What do I benchmark against?

Knowledge Test

Knowledge Topics

If you compare the investment performance of your Self-Managed Super Fund (SMSF) to inappropriate benchmarks, you risk taking action based on incorrect information, which could have significant implications.

The benchmarks typically used by SMSF investors are:

  • The S&P ASX200 Index
  • A listed property index
  • The cash rate
  • A multi-sector model portfolio

The problem is that there are limitations with each of these benchmarks when it comes to SMSFs.

Terry invests 100% of his SMSF in Australian shares. The problem with benchmarking against the publically available S&P ASX200 index is that this is a “price index” only. If he compared his investment return against this index it is going to be artificially flattering for him, as he will also have earned dividends. This could cause him to come to an incorrect conclusion about how his current investment approach is going.

Further, SMSFs tend to have different sector weightings than the ASX200, so this index may not be the best to use. Also, the average SMSF has some indirect exposure to International shares, via trusts and funds, so It may be more appropriate to compare against a “benchmark portfolio” of how SMSFs are typically investing, according to ATO Statistical Reports, or against other SMSFs investing in a similar way.

Michelle invests with a diversified portfolio where she set a target asset allocation of 60% Growth assets / 40% Defensive for the first 2 years and 6 months, before changing her target asset allocation to 80% Growth / 20% Defensive for the next 6 months.
She receives a Performance report comparing her 3 year return to a Multi-sector model portfolio.

There are 2 problems:

  • Michelle notices that the asset allocation of the generic multi-sector benchmark is quite different to how she has invested, or indeed to how SMSFs invest in general.
  • She also notices that the multi-sector benchmark they have chosen to compare against has 80% in growth asset / 20% Defensive, just because that’s how she was placed at the end of the 3 year period.That would be fine for her half-yearly return, but not for her 3 year return.

Michelle needs better information based on how she actually invested over time, allowing for any changes she made along the way.

Similarly, if you directly invest in property you should not benchmark against listed property, and if you invest in term deposits, you could have accessed defensive assets through other approaches, so a benchmark including broader fixed interest may be more appropriate.

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