Self-managed super funds with assets of less than $2 million "are not viable retirement savings vehicles", says Stephen Anthony, the chief economist at Industry Super Australia (ISA).
In an analysis of ATO figures on DIY super funds and APRA figures by Anthony and colleague financial analyst Gary Lu, over the seven years to mid-2015, the latest available, the typical industry fund produced an average annual return of 5.9 per cent.
![DIY versus large super funds - industry funds hit back.](/web/20170310030413im_/http://www.brisbanetimes.com.au/content/dam/images/g/p/5/2/t/9/image.related.articleLeadwide.620x349.gufafa.png/1487664214661.jpg)
The typical retail fund, those run by the banks and insurers, returned 4.72 per cent.
DIY funds with between $100,000 and $200,000 had a typical average annual return of minus 1.71 per cent. DIY funds with less than $100,000 had even worse returns.
The ATO figures show that over seven years (data is not available for 10 years) only those DIY funds with assets of more than $2 million outperformed the industry funds' 5.9 per cent with an average annual return of 6.29 per cent.
However, all DIY fund sizes, including those with more than $2 million, underperformed industry funds over three and five years.
Anthony says if you cannot achieve scale and get a properly diversified DIY super fund you are likely to be in an "adverse investment return position".
Another reason for the poor performance of small DIY funds is that the fixed costs are high, relative to the amount of money in the fund, he says.
The smaller DIY funds are more likely to have one business property or investment property or most of their money in low-returning cash investments, Anthony says.
He takes issue with research by Rainmaker reported in this column a fortnight ago that showed over 10 years there's hardly any difference between the performance of not-for-profit funds, such as industry funds, and DIY funds.
The Rainmaker research gave the typical average annual average return of about 5 per cent, for both industry funds and DIY super funds,
Retail funds, those run by the banks and insurers, produced a return of 2.9 per cent.
However, the Tax Office performances data aggregated by Anthony and Lu shows there is really no typical DIY fund return.
With industry funds, there is a tight dispersion of returns around the typical returns as the asset allocations of their balanced investment option, where most members have their super, are broadly similar.
Those in the same investment option will receive identical returns regardless of account size.
On the other hand, the huge variation in DIY fund sizes results in a huge variation of performances.
About 20 per cent of DIY funds have assets under $200,000, 24 per cent between $200,000 and $500,000, and 24 per cent between $500,000 and $1 million.
That leaves about one third with more than $1 million. Anthony says the returns of many large DIY funds will be far higher because they are in the pension phase and pay no tax.
Anthony says the growth in DIY funds reflects "selling" by advisers and accountants, which is increasingly targeted at a younger population where there are concerns over the level and quality of information given.
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