User Guide

SMSF Benchmarks – User Guide

At SMSF Benchmarks, we aim to give the best information available about Investment performance and benchmarking for SMSF investors and their advisers.

Learn all about how SMSF Benchmarks works and what’s involved. View or print this PDF version of our User Guide  160226 user guide, or refer to the sections below:

Welcome to SMSF Benchmarks.

We aim to give SMSF Investors and their advisers the best information available about how their fund is going in a range of areas.

We will do this by introducing reports in stages:

Stage 1: Peer to Peer comparisons, with 18 pieces of information available each month about balance, returns and risk.

Stage 2: Comparisons against Benchmark Portfolios specifically designed for SMSFs

Stage 3: Your “Personal Investor Profile” – giving you information about how your behaviour has affected your performance. Has it helped, or has it hindered?

This information is expected to empower you to make better decisions and get better outcomes over time.

It will be based on “crowd-sourced” data, so the more funds using the service, the better the information will be for you and for the overall SMSF community.

To do this, we need to record some information about your fund to get started, and some information to allow us to accurately calculate your returns along the way.

We will also need to record any changes to your fund information over time, so we can help you compare to the most appropriate groups of other SMSF Investors and build an accurate Personal Investor Profile.

This User Guide explains how it all works. There is a PDF version to read or print (above), or read on. Use it as a reference for particular queries, even if you never read it from cover to cover.

You may also want to refer to our FAQ and Tutorial sections.

Contents

Subscriptions

Foundation Members

Subscribing through your Adviser / Accountant

Initial Setup of Fund and Member Information

Fund Information

Fund Name

Main Source of Advice

Asset Allocation Approach

Your SMSF Benchmark Portfolio

Borrowings associated with fund assets

Member information

Member Names

Main Manager

Member Balance as proportion of fund (%)

Phase

Update Monthly Data

Manually inputting Valuations and cash-flow data

Engaging us to do it for you

Editing Monthly Data

The “Update Period”

View months to update

Dashboard

Terminology

Comparison against all other funds

Comparison against other “Similar” funds

Comparison against other funds in the same Age Group

Comparison against other funds in the same Phase

My Balance

My Performance

Risk Vs Return compared with all other funds

Risk Vs Return compared with other similar funds

Distribution of returns for all funds

Distribution of returns for all similar funds

Level of asset allocation risk compared with all funds

Level of asset allocation risk compared with others of the same age group

Level of asset allocation risk compared with others of the same phase

Level of gearing risk compared with all funds

Level of gearing risk compared with others of the same age group

Level of gearing risk compared with others of the same phase

Appendix

Our SMSF Benchmark Portfolios

Similar funds

Strategic Asset Allocation (SAA) approach

Tactical Asset Allocation (TAA) approach

Adaptive Asset Allocation (AAA) approach

Similar funds – each month

Similar funds – over longer periods

Calculating returns

Internal Rate of Return (IRR)

Time-Weighted rate of Return (TWR)

An Industry-wide problem. Comparing returns

 

 

Subscriptions

SMSF Benchmarks is a premium service, providing 18 pieces of benchmarking information each month, with additional reports planned for subsequent stages.

There is a subscription fee.

Foundation Members

We call our first 300 funds “Foundation members”. They are entitled to significant discounts as they are helping us kick-start our service with a reasonable base of funds to compare against.

Of course, as it is “crowd-sourced” information, the more subscribers over time, the better the information will be.

Subscribing through your Adviser / Accountant

If your professional adviser or accountant registers with SMSF Benchmarks, you may subscribe through them. The benefits of doing this include:

  1. It may be cheaper for you
  2. Your adviser will have access to update your information and view your reports
  3. You may receive reports from them with their interpretation and advice, which is possibly of greater value to you than simply viewing the reports in your dashboard
  4. We would not need your billing details. Note that we would not keep your credit card details on our site in any case.

You may like to view a tutorial on the Subscription process, especially if you have been given an Adviser Code or a Discount code to use when subscribing. View the tutorial here

Initial Setup of Fund and Member information.

At the end of the subscription process, or when you first login to SMSF Benchmarks, you will need to set up your “Fund” and “Member” information.

View the tutorial here, or read on for more information.

Fund information

Fund Name

Whichever name you enter here will appear on your reports. We do not use the name for any other purpose.

Main Source of Advice

Record whether your main source of advice is an adviser or yourself (using media articles, research or whatever).

In later stages we plan to give you some additional reports using this information, so we want to capture this from the start to give you the best possible information over time.

fund info

Fig 1: SMSF Benchmarks – Fund information

(Click image to expand)

Asset Allocation Approach

Select whether you are using a Strategic Asset Allocation (SAA)  , Tactical Asset Allocation (TAA)  , or an Adaptive Asset Allocation (AAA) approach.

Please refer to the Appendix to understand the difference between these approaches, and why we need it to give you accurate and powerful performance reports. You could also use our detailed glossary, FAQ and our blogs to learn more.

Your SMSF Benchmark portfolio

We have designed 11 benchmark portfolios to group SMSFs investing in a broadly similar way to each other, and these will be used for comparisons against other “similar” funds.

You may want to refer to our whitepaper on “Designing Benchmark portfolios for SMSFs” for detailed information.

If you are using a Strategic Asset Allocation (SAA) or a Tactical Asset Allocation (TAA) approach you have a “target” asset allocation. Please select which of the 11 SMSF Benchmark portfolios is most similar to the asset allocation you are currently aiming to maintain.

Focus mainly on the Growth / Defensive split, such as 60% Growth assets / 40% Defensive (which we call SMSF 60). Note however that SMSF P1 and SMSF P2 are benchmark portfolios specifically designed for those with directly owned property.

Refer to the Appendix for more information on our SMSF Benchmark portfolios.

Borrowings associated with fund assets such as property

Record here the amount of borrowings belonging to the fund. This is usually going to be associated with a property.

Member Information

Member names

Record either your real names, or pseudonyms. That’s up to you.

However, all other information about members should be real to make sure our reports are accurate and useful for you.

Main Manager

It’s up to you who you nominate as the “Main manager”, but it will usually be the person with the highest account balance in the fund.

For comparisons of balance you can compare at an overall Fund level, or at an individual Member level, which may be more appropriate for single member funds, or funds with varying age groups.

When comparing balances at the fund level against other funds in the same age group and phase, we use the age and phase of the “Main Manager”.

When comparing balances at the member level, we use the actual age and phase of each member in each fund.

Member Balance as proportion of fund (%)

Estimate the proportion of the fund which belongs to each member. We will use this for comparisons of balances at the member level.

Member info

Fig 2: SMSF Benchmarks – Member information

(Click image to expand)

Phase

By phase, we mean whether each member is in “pension” or “accumulation” phase.

Where a member has one or more pension accounts and an accumulation account, choose the phase with the greater balance.

Update Monthly Data

Once your Fund and Member information have been setup, it’s time to bring in valuation and cash -flow information, to let us calculate your returns and start giving you some powerful reports.

In due course we expect that valuation and cash-flow data will be automatically brought in, with your permission, but initially there are 2 ways valuation and cash-flow data can be recorded:

  1. Manually input data;
  2. Engage our “Elf” to input the data for you

1.      Manually Inputting Valuations and Cash Flow data

You may wish to view our Tutorial on Manually inputting data, or read on.

To manually input data, take the following steps:

  1. Click on “Update monthly data” and select the month that you are going to be entering valuations and cash flow for. Begin with the oldest month you want to go back to, and work forward to the most recent.

update monthly data

Fig 3: SMSF Benchmarks – Update monthly data

(Click image to expand)

  1. Verify that the prompted Fund and Member info is still correct for that month, or modify it if applicable. (Nb: Most of the time nothing will have changed, but be sure to record any changes to your Fund or Member information, so that we help you compare against the most relevant groups of other SMSFs over any period.)
  2. Click on the + sign to add a fund asset in your fund, or “review” to edit an existing one.
  3. Enter a name for that fund asset, and a gross valuation. Note that any debt associated with the asset should be recorded separately in the Fund Info area.
  4. Record the estimated % asset allocation for each fund asset. This may be obvious in most cases, but can require a bit of research (or estimation) for things like Balanced Funds. If you happen to have investments in infrastructure or hedge funds, record these as “Other”. Term Deposits should be treated as Australian Fixed Interest, rather than cash, if their term is 3 months or longer.
  5. Repeat the process for each fund asset, until all are recorded, then click “next”.
  6. Cash flow is really everything you would see in your Cash Statement. Enter the date of the first cash flow item and from the drop down box, select which “Transaction type” is the best match. The description is whatever you want to call it – that’s not going to be important for us, but may help you verify what it was.
  7. Click on the + sign to add each new cash flow item for the month until finished. Click next then “Finish” and you’re done.
  8. From your home page you should be able to view the valuations and cash flow you just entered in “Valuation History” and “Cash flow History”, for the relevant month.

Note: Once you have entered your portfolio with the asset allocation for a particular month, this portfolio will be prompted to you in the next month, making it easy to edit without having to enter everything again.

 2.      “Engaging our Elf” to input Valuation and Cash flow data for you

You can view a tutorial on “How to get us to enter the data for you”, or read on.

Until such time as we have automatic feeds of data coming in, with your permission, you can manually input the information – or get us to do it for you.

Follow these steps:

  1. For a particular month, create a file with the valuation of all fund assets as at the last day of that month (eg/ 31 March 2016). This could be a spreadsheet, word document, a scan of a statement or a scan of a back of the envelope – whatever. Save it on your computer and note where it is saved.

Tip: It’s up to you, but you may prefer to remove references to your fund name, member names or account number relating to external services. We do not need this information.

  1. Create another file for the cash-flow (transactions) which occurred in the month. We need to know the date, amount and description of the transactions (eg/ pension payment, fee, contribution, tax)
  2. From your home page, select “Products” in the top menu, and choose the “Elf Inputting Service”.
  3. Enter your Account code and upload the file (files) for the month before hitting “Add to cart”.
  4. Give us 3 working days to process your data, then you’ll receive an email from us to confirm we have input the data. Click on “Update monthly data”, to verify (or edit) your Fund and Member information, Valuations and Cash flow, for that month, then view your reports in the Dashboard.

Editing monthly data

If you become aware that you’ve made a mistake in a previous month, that’s no problem.

  1. Click on “Update monthly data”
  2. Select the month you wish to edit
  3. Make any changes to fund or member information, valuations or transactions for that month
  4. SMSF Benchmarks will recalculate your returns, and re-assess the most appropriate group of funds to compare against, based on your new information.
  5. In this way, over time, you can build accurate long-term returns, ensure your comparisons are against the right groups of other SMSFs or benchmark portfolios, and build a Personal Investor Profile.

The “Update Period”

At the end of each month, we need to record valuations and cash flow movements.

It may take some days to get the data in before we can start comparing funds.

Our process will be as follows:

  1. On the 1st of each month we will send an email reminder that it’s time to record your valuations and cash flow for the prior month and ask that, where possible, you do this before the 7th of the month;
  2. Manually input the data, or save it in your secure area using our “Elf Inputting service”, for us to take care of it for you.
  3. Allow a reasonable time for us to input the data and process reports.
  4. We will send another email to confirm when we have processed the calculations of medians, and your reports are ready for viewing on your Dashboard.
  5. As more data is recorded, the calculations of median balances, returns and risk for each group will be regularly refreshed and will automatically be reflected in the reports on your dashboard.

View Months to Update

You may wish to view our tutorial titled “Does it matter if I don’t record monthly data?” or read on for further details.

You don’t have to input data monthly, for example we can calculate your investment return over a year if we know your fund valuation at the start of the year and at the end of the year, and if we knew the date and amount of any cash-flow such as contributions or withdrawals.

However, the calculation of your returns is much more accurate if we do record valuations as at the end of each month, especially in months where you made contributions or withdrawals

Also, by capturing any changes to your fund and member information each month, it helps you compare against the right group of funds, and build a Personal Investor profile for later reports.

Tip: Whenever “Updating monthly data” for any month, use the fund and member information which applied in that month – which may be different to your current situation.

It is likely that a few months will be missed here or there, and that’s fine, we carry forward the most recent valuations we had over those “missing months” until the next month with a known valuation, so you can still get reports.

But if you want to go back and update the months that were missed for more accurate information, them a feature of SMSF Benchmarks is the “View Missing Months” button. This is where we let you know the months we have “carried forward” valuations as a best estimate, so you go back and update information if you want to.

When you update your monthly information, not only will your short and long term returns be recalculated, but a re-assessment will take place of which funds are the right group of funds to compare against over any period.

Dashboard

Once your fund information has been setup, and we have recorded valuations for at least the beginning and end of a period, you will be able to view reports in your Dashboard.

You may want to view the tutorials titled “How is my fund progressing?” and “How is my fund performing?” or read on for more detailed information.

Your Dashboard is where you can view all reports showing how your fund is performing in a range of ways, over different periods.

You can click on “My Balance” or “My Performance” to view different types of reports.

Use the reports as only one source of information, before making any decision in relation to your investments.

Note: If you have not yet updated all months’ information, your reports may not be totally accurate. On your home page, click on “View Months to Update” to check if you need to take any action.

Terminology

Comparison against all other funds

Any reports comparing your fund against “all funds” means SMSF Benchmarks is comparing against the median of all other Self-Managed Funds which have subscribed to our service.

Comparison against other “Similar” funds

Any reports comparing your fund against other “Similar funds” means SMSF Benchmarks is comparing against other (subscriber) funds which are investing with a similar asset allocation to you, implying that they have taken a similar level of risk to you.

Note: Please refer to the Appendix for more detailed information on how we compare against Similar Funds.

Comparison against other funds in the same Age Group

For comparisons at the fund level, SMSF Benchmarks uses the age of the main manager and compares against the median of all other funds in that age group.

For comparisons of balance at the member level, SMSF Benchmarks uses the age group of every member in every fund, and compares against the median balance of all members in the same age group as your selected fund member.

Comparison against other funds in the same Phase

For comparisons at the fund level, SMSF Benchmarks uses the phase (accumulation / pension) of the main manager and compares against the median of all other funds in that phase.

For comparisons of balance at the member level, SMSF Benchmarks uses the phase of every member in every fund, and compares against the median balance of all members in the same phase as your selected member.

My Balance

The reports in “My Balance” show how your Fund balance is progressing compared with:

  1. All other funds
  2. Other funds investing in a similar way to you
  3. Others of the same Age Group and
  4. Others in the same Phase

A feature ofSMSF Benchmarks is that you can select whether you want to view these reports at the Fund level or the Member level. If you want these reports at the member level, you can view them for any member of your fund.

Tip: It can be confusing when all of these comparisons are displayed at once. You can click on the descriptions in the Legend to turn specific comparisons on or off.

my balance

Fig 4: SMSF Benchmarks – Fund Balance comparisons

(Click image to expand)

The reason SMSF Benchmarks allows comparisons at the member level, as well as the overall fund level, is to cater for single member funds, where a comparison of fund value is not fair as other funds have more than one member.

It is also helpful where there are large differences in age groups within the fund. For example, a young member of your SMSF may be interested to see how their balance is going compared to all other members in the accumulation phase, as opposed to how the total fund value is going.

my balance- member

Fig 5: SMSF Benchmarks – Member Balance comparisons

(Click image to expand)

My Performance

As performance is a function of both risk and return, SMSF Benchmarks will display reports comparing total fund returns over a period alongside reports comparing the level of risk taken to achieve those returns, over the same period.

For these reports you will need to enter the period you want to look at.

You can compare monthly, quarterly, half-yearly, 1y, 3y or 5y performance as at the end of any month – once we have recorded the data for those periods.

Note: You can backdate your initial fund balance to the end of June 2014 – which gives an opening balance as at 1 July 2014, and start measuring and comparing returns from that time. You can enter data for before that date, but other funds may not be doing so which means you can’t rely on the comparisons.

Risk Vs Return compared with all other funds

This report plots the return your fund achieved and the level of risk taken to achieve that return, over the selected period, compared with the median return of all funds and the median level of risk taken by all funds over the selected period.

Monthly Returns are calculated using a Time Weighted Return (TWR) method in all cases, then geometrically linked to give longer term returns.

If there are missing months of data of a period, SMSF Benchmarks copies forward the most recent valuations over the missing months, which allows us to calculate a good estimate of returns over the period.

However, if large cash-flow such as contributions or withdrawals occurred during those missing months, or if you changed your fund details (such as your target asset allocation), then your reports may not be accurate. You can view the missing months as a prompt, on your homepage, and select a month to update, which will force a re-calculation, and a re-assessment of which groups of funds to compare against, which gives you more accurate and relevant reports.

Note: Refer to the Appendix for more information about why Time Weighted Returns should always be used for performance comparisons.

For this report SMSF Benchmarks measures risk in terms of “asset allocation risk”. The higher the exposure to Growth assets (such as shares and property) in a portfolio, the greater the chance of permanent loss of any capital and the greater the volatility in the short term.

Returns are annualised for periods greater than 12 months.

Risk Vs Return compared with other similar funds

This report plots the return your fund achieved and the level of risk taken to achieve that return, over the selected period, compared with the median return of other funds which invested with a similar asset allocation to your fund, over the period.

risk v return

Fig 6: SMSF Benchmarks – Asset Allocation Risk Vs Return

(Click image to expand)

Distribution of returns for all funds

This report shows the proportion of all funds you out-performed over the selected period. It is a form of ranking.

Note: We have simply overlaid this over a bell shaped picture for demonstration purposes. It is not meant to indicate that there is a normal distribution of fund returns. In due course when we have a suitable number of subscribers we may be able to show actual distributions.

Distribution of returns for similar funds

This report shows the proportion of all similar funds you out-performed over the selected period.

This may be more meaningful than a comparison against all funds, because it informs you how many funds investing with a similar risk, you out-performed over the period.

distribution

Fig 7: SMSF Benchmarks – Distribution of returns

(Click image to expand)

Level of asset allocation risk compared with all funds

This report shows how many funds you are taking more asset allocation risk than. This is measured by % Growth assets.

SMSF Benchmarks compares your asset allocation at the end of the period with the median asset allocation for all other funds.

Level of asset allocation risk compared with others of the same Age Group

For this report, SMSF Benchmarks compares your asset allocation at the end of the period with the median asset allocation for other funds in your age group.

This report lets you know how much risk you are taking, compared with other funds of the same age group.

asset allocation risk

Fig 8: SMSF Benchmarks – Asset Allocation Risk comparisons

(Click image to expand)

Level of asset allocation risk compared with others of the same Phase

SMSF Benchmarks compares your asset allocation at the end of the period with the median asset allocation for other funds in your Phase.

This report lets you know how much risk you are taking, compared with other funds in the same Phase.

Level of gearing risk compared with all funds

The gearing ratio in your fund is the amount of debt divided by your gross assets

This report shows the proportion of all funds that you had a higher gearing ratio than, at the end of the selected period.

It helps you understand how much gearing risk you are taking compared with all other funds.

gearing risk

Fig 9: SMSF Benchmarks – Gearing Risk comparisons

(Click image to expand)

Level of gearing risk compared with others in the same Age Group

This report shows how much gearing risk you are taking compared with other funds in your Age group.

Level of gearing risk compared with others in the same Phase

This report shows how much gearing risk you are taking compared with other funds in your Phase.

Appendix

Our SMSF Benchmark Portfolios

SMSF Benchmarks have designed a series of Benchmark Portfolios specifically for Self-Managed Super Funds (SMSFs) because they tend to invest differently to large super funds and need different benchmarks for comparisons to be relevant and useful.

Two of the Benchmark Portfolios cater for those investing in Direct Property.

Using the ATO’s annual SMSF Statistical report for June 2014 (published Dec. 2015) we then determined the average asset allocation SMSFs are actually using across “Growth assets” and across “Defensive assets”. To do this we excluded Direct Property, as this asset class is catered for separately, and used a “look through” approach for investment trusts and managed funds.

Using this average asset allocation for “Growth assets and for “Defensive assets” we then designed a further 9 Benchmark Portfolios based on deciles of “Growth assets” to cater for investors with different risk profiles.

Every SMSF investor can find a Benchmark Portfolio which is appropriate for them, no matter how they are investing.

Find out more in our whitepaper on “Designing Benchmark Portfolios for SMSFs”, which is located in our knowledge centre.

Similar Funds

By their very nature SMSFs can invest using just about any approach they want. A comparison of performance against “all” other funds is relevant. It helps to answer the question “Could I have achieved a better outcome if I had invested a different way?”

As performance is a function of both risk and return, it is perhaps even more relevant to compare your performance against others who have invested with a similar “asset allocation risk” to you. It helps to answer the question “Did I get the return I should have achieved, for the risk I took?”

This is not straight forward, because your intended (target) asset allocation can vary from your actual asset allocation at times and both your target asset allocation and actual asset allocation can change over longer periods.

To get a meaningful comparison against funds investing with a similar risk to you, SMSF Benchmarks needs to capture both the target and the actual asset allocations each month, and work out which is the appropriate group of funds to compare against over any period of time.

Choosing the right group of funds to compare against depends on the asset allocation approach used by each fund at various times.

Strategic Asset Allocation (SAA) approach

A Strategic Asset Allocation (SAA) approach is where an investor aims to maintain a specific asset allocation, as a “Neutral” position. Let’s call this their “target asset allocation”. They will regularly re-balance their portfolio to keep in line with their target asset allocation. Trustees using a SAA approach are deliberately not attempting to add value by predicting which asset class is about to perform well.

The target asset allocation will consist of a certain mix of Growth assets (such as Australian shares, International shares and property) and Defensive assets (such as bonds, term deposits and cash).

Tactical Asset Allocation (TAA) approach

Funds using a Tactical Asset Allocation approach also aim to maintain a target asset allocation for a period, but they tend to change their target asset allocation from time to time, based on tactical decisions of where they see opportunity.

Adaptive Asset Allocation (AAA) approach

Funds using an Adaptive Asset Allocation approach follow perceived investment opportunities without any regard for asset allocation.

One month they may be 80% in shares, and the next month they may be 80% in cash.

The idea of re-balancing to keep in line with any target asset allocation is irrelevant for investors using an AAA approach.

Similar Funds – Each Month

Consider the following examples:

Example 1:  Let’s say a fund was using a SAA or a TAA approach in a particular month, and that they had a target asset allocation of 60% in Growth assets. However, let’s say the fund actually had 80% in Growth assets, because they failed to re-balance their portfolio, or they made a tactical decision to remain over-weight Growth assets for a while.

How does SMSF Benchmarks choose which funds were investing in a similar way to this fund, in this month?

Our approach will be to compare this fund against others who were also aiming to maintain 60% in Growth assets, and against those using an AAA approach who actually had 60% in Growth assets at that time.

That’s because their benchmark should be based on what they were aiming to achieve. The fact that they were over-weight or under-weight Growth assets will be one reason for any out-performance or under-performance.

Example 2:  Now let’s say the same fund was using an AAA approach, in a particular month, and they had 80% in growth assets. The right group of “similar” funds to compare against now includes others with a target asset allocation of 80% in growth assets and others using an AAA approach who actually had 80% in Growth assets.

In this case, because they were not aiming to maintain any target asset allocation, their benchmark should be based on their actual asset allocation.

Similar Funds – Over Longer Periods

So we have explained which group of similar funds we will compare your performance against in a particular month, but what about the fact that your approach, and the approach of every other fund can change over time?

Example:

Let’s say you were using a TAA approach, and for the first 3 months of a year you aimed to maintain 40% in Growth assets. Then you felt more confident with the share market, and changed your target asset allocation, aiming to maintain 80% in Growth assets for the next 7 months, before changing to 30% Growth assets for the last 2 months of a year.

Which group of funds would be appropriate to compare your 12 month returns against? Certainly not a group with 30% Growth assets just because that’s how you were placed at the end of the year.

Our solution is to record for every fund the asset allocation approach they were using each month, which target asset allocation they had (if applicable) and which actual asset allocation they had.

This allows us to calculate the median asset allocation each fund had, or was aiming to maintain over longer periods. We then compare each fund against other funds which had the same median asset allocation over that period.

For this reason, every month when SMSF Benchmarks records valuations and cash flow to calculate returns, we also ask subscribers to confirm their fund and member info, and keep us informed of any changes.

By doing this, it gives investors the best benchmarking information available, allowing for the dynamic nature of SMSFs for the first time in the industry.

Calculating returns

There are 2 main methods used to calculate investment returns:

  1. The Internal Rate of Return (IRR – also known as the Money Weighted Return, MWR); and
  2. The Time Weighted Return (TWR).

Internal Rate of Return (IRR)

The IRR method is affected by the size and timing of cash flow movements, such as contributions or deposits.

It gives greater weight to returns in periods where the fund balance was highest.

This affects Self-Managed Funds as it does professional fund managers, because contributions of  $450,000, for example, can be made depending on timing of inheritances, or property sales.

This means that whilst the IRR method is suitable for measuring growth of a Self-Managed Fund relative to a personal objective, returns based on the IRR method should not be used for comparisons between Self-Managed Funds, comparisons against an industry fund, or comparisons against an index.

Time Weighted Return (TWR)

The TWR method removes the effects of cash flow movements into and out of the fund. It weights returns equally from each period, regardless of how much money was in the fund at any time.

This allows fair comparisons of fund performance between Self-Managed Funds and against an appropriate benchmark.

Example 1:

Sue had an opening balance of $500,000 on 1 July 2013, when the unit price of her portfolio was 100.

By the end of December her portfolio unit price had fallen 10%, to 90. However by 30 June 2014, it had risen strongly to finish at 130.

Assuming she made no contributions or withdrawals during the period, her annual return under both an IRR method and a TWR method was 30%.

Example 2:

Now let’s say that Sue, in the above example, received a settlement of a property sale outside her fund on 31 December 2013. Her adviser recommended her to make a $450,000 contribution to her fund upon settlement.

Her annual return using an IRR method was now 49.9%, whereas her return using a TWR would still show as 30%.

This example demonstrates that returns using an IRR method can vary wildly, depending on the timing of contributions and withdrawals, yet returns based on the TWR method are not affected.

Therefore for fair comparisons between funds or against any benchmark, the TWR method must be used.

Here is the formula for calculating returns using a TWR method:

TWR method

Fig 10: SMSF Benchmarks – TWR calculation

An Industry-wide Problem in Comparing Returns

Many administration services report returns which have been based on the IRR method. This is fine for the purposes of looking at the Self-Managed Fund in isolation, but it is meaningless if investors want to compare their performance to something.

Other administration services use a Time Weighted Return (TWR) method.

In our industry, many surveys of Self-Managed Funds ask the SMSF investors or their advisers what their returns have been for a particular period. Their response is naturally going to be based on what has been reported to them.

Subsequently, the surveys contain a mix of returns based on the IRR method and those based on the TWR method.

This is problematic, to say the least.

Our approach is to calculate returns for all our subscribers using a TWR basis, thereby allowing them to receive fair comparisons of performance.