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Manage your own ’Balanced’ Super fund using index ETFs

By July 21, 2015November 22nd, 2023Active Investor Education, Uncategorized

Industry Super Fund, AustralianSuper is very noisy in the press regularly bagging SMSFs, talking up their returns and results, and highlighting the amount of funds they have under management. Their Balanced Fund, which has more than $65 billion under management, returned 10.86% for the 2014-15 financial year after fees and taxes. The average annual return for this Balanced Fund over the last 10 years has been 7.64%.

At first blush, the return of 10.86% last year is pretty impressive. A bit of investigation reveals that much of this return can be attributed to 31% of the funds under management being held in international shares and thus reaping the benefit of a weakening Australian dollar. The fund managers have obviously made this decision based on their analysis and research, and the fund has performed very well as a result.

Using ASX listed ETFs, it is possible for SMSFs and other Australian investors to implement a similar, easy to manage strategy that would have delivered an even higher return. This strategy involves allocating 50% of your capital into the STW ETF and 50% into the IVV ETF. (STW tracks the top 200 companies in Australia and IVV tracks the S&P500 which is the top 500 companies in the US.) The IVV ETF is the ASX listed S&P500 ETF that is denominated in Australian dollars. This gives you exposure to the S&P500 Index in Australian dollars, without needing to convert into US dollars to use a US listed S&P500 Index.

The return for the STW last financial year was around 5.31% when dividends are included. The return for the ASX listed IVV in the same period was 30.28% including dividends, yet the return for the US listed IVV ETF was 6.24%. From this we can determine that approximately 24% of the ASX listed IVV ETF performance can be attributed to the devaluing Australian dollar (30.28% – 6.24% = 24.04%).

We can also deduce that AustralianSuper Balanced is unhedged against the USD.

Assuming that we have 50% of our capital allocated into each ETF, the total return for financial year 2014-15 (assuming a Buy and Hold approach) would have been 17.64% before taxes. (30.28% return from IVV + 5.31% return from STW = 35.59%, divided by 2 = 17.64%). If we take a SMSF tax rate of 15%, the net return would be just under 15% at 14.99%. This is a GREAT return that is at least 40% better than the 10.86% return being talked up by AustralianSuper for their Balanced fund.

The BIG question that this information leads us to is: “What happens if the US dollar weakens, strengthening the Aussie dollar, or if there is a big fall in offshore markets?”

AustralianSuper Balanced fund is 62% allocated into ASX and offshore share markets, so either of these events would make a considerable impact on their investment returns in the short term as their Balanced fund does not hedge against currency movements.

The SMSF or investor using the ETF strategy discussed above could simply exit into cash in such a scenario thus alleviating the effects of either (or both) events. DIY investors using this ETF approach have the flexibility and ability to exit to cash during these periods, whilst the fund managers have to stay fully invested.

I say ‘simply’ because our SPA3ETF product will generate unambiguous signals to move to cash should either the market fall or, in the case of the IVV listed on the ASX, the AUD strengthens against the USD for whatever reason.

This strategy can be followed directly yourself with Share Wealth Systems tools and methods or through a Managed Account. If you are too busy, or not placed well at the moment to undertake this investment scenario yourself we have teamed with a boutique investment manager who can implement and manage this scenario and other Share Wealth Systems programs for you through a Managed Discretionary Account.

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