SMSF Returns

That time of the year again. Sit up and watch the tour and do the superannuation return.

I use BGL’s simple fund to do the books. At this stage the books are not audited for 2011/2012 but everything balances.

The fund has two members both in accumulation phase for next 20 odd years. Only a very small amount of contributions/rollovers added this year. The fund is sufficient that we try to minimise contributions.

Even though this is an anonymous forum I’m choosing to keep balance private - to put the returns and strategy into context it should be sufficient to indicate that the fund is in excess of a million dollars. The combination of fund balance and time until access allows for an aggressive risk profile.

Strategy is basically to buy quality businesses at a price that I think makes sense and hold them for as long as the business continues to perform. If I can't find anything to buy at the right price I stay liquid and wait.

Cash & Interest rate securities currently stands at 13% of funds, the rest is invested in 9 Australian listed companies Not a lot of activity this year, one company sold in script offer and replacement is being sold down, some rebalancing of positions that have grown large and some accumulation of a couple of the other holdings.

2011/2012 results.

Gross Investment Return = 19.25%
(2010/2011 = 63.40%; 2009/2010 = 37.45%)

After tax and expense Return = 17.30%
(2010/2011 = 56.54%; 2009/2010 = 30.67%)

Due to unrealised gains there is a difference between tax expense and tax paid. This difference is accounted for as a ‘Deferred Tax Liability’ and is currently an additional $39,000 per Million of Net Assets that is available for investment. This amount is effectively a tax free loan from the tax office until a capital gains event occurs. If that event does not occur until after age 60 the tax office will kindly wave the liability.

Expenses:

Administration expenses including life insurance = .08% [$800 per Million of Net Asset]

Brokerage = .03% [$300 per Million of Net Assets]




Anybody else like to share their SMSF thoughts, strategies or results.

Craft,

What are the costs for BGL simple fund software?
-- assume that you get at least annual updates!

bigdog said:

Craft,

What are the costs for BGL simple fund software?
-- assume that you get at least annual updates!

Click to expand...

I buy a trustee licence. Just renewed and it cost $431 p.a.
Your licence provides all updates throughout the year and there is quite a few to keep up with legislative changes etc.

Software is directed towards accounting users and you will need some understanding of double entry to be able to input the transactions. Once transactions are in you hit ‘create entries’ button and the software basically dose everything else – allocations, revaluations, reports, tax returns etc....

Export and email a file to the auditor who also uses simple fund and the job is done.

I believe most accounting firms also use Simple fund – what I can’t understand is how they charge so much for so little work, especially when their software cost on a multi-fund licence would be just a few bucks per fund.

More than decent returns there Craft, your strategy of buying cash flow in decent businesses seems to be working just fine.

A good result in the current environment, Craft. It may further cheer you to know that I was talking with a full service stockbroker a few days ago and was curious enough to ask her what sort of returns she'd been achieving for her clients. She proudly announced that they'd done very well, with a 2% positive return for the FY. That was before tax.

When you come to draw an income from your Fund will you continue what you describe as the fairly aggressive strategy you're presently using?

(I'm assuming you currently have an alternate source of day to day income.)

craft said:

I believe most accounting firms also use Simple fund – what I can’t understand is how they charge so much for so little work, especially when their software cost on a multi-fund licence would be just a few bucks per fund.

Click to expand...

We don't use Simple Fund where I work. It's far from perfect - some of the numbers and tax calculations it spits out are wrong. That being said, for straight forward calculations it usually does the job.

Accountants charge so much because they (by rights) should pick up these anomalies. They also have more overheads like staff, leases, electricity... like any business. Time costs are high for starters becase educated staff aren't always cheap. Although the proliferation of cheap labour from India might have something to say about that. I digress. Software is generally more expensive in offices (because it is has more functionality than a "home version") You are paying for years of training, knowledge and expertise. You are also paying a firm a percentage of profit (Why would they open, otherwise?). In saying that, most accounting firms probably write off money on Funds that insist on being done cheap.

Compliance for professional bodies (ie. internal review systems, preparation and archiving of workpapers) and administrative functions take up a lot of time. You just cannot skip it without risking potential professional indemnity claims being disregarded in the future or action taken by CPA or CA after one of their compulsory audit reviews.

By the way, it isn't the job of your Fund auditor to look at the tax return & the tax calculations in minute detail (and nor are they required to). They may take sampling of source documentation and look at the headline figures, but in the main it is a compliance function (has the Fund operated within the SIS legislation? has it operated within the rules of the Trust deed?).

I am sure there are more reasons. But that's why you can do your own Fund cheaper than I could in the workplace. You have far less hoops to jump through.

Julia said:

When you come to draw an income from your Fund will you continue what you describe as the fairly aggressive strategy you're presently using?

Click to expand...

Depends on the balance at the time. If there isn't oodles of capital in excess of requirements then I would be a lot more conservative. Having the liquidity to meet minimum withdrawal requirements is going to become an issue at some stage once the minimum exceeds the dividend stream.

(I'm assuming you currently have an alternate source of day to day income.)

Click to expand...

Same source of income (ie investing) but obviously in a fund external to super.

Ves said:

We don't use Simple Fund where I work. It's far from perfect - some of the numbers and tax calculations it spits out are wrong. That being said, for straight forward calculations it usually does the job.

Accountants charge so much because they (by rights) should pick up these anomalies. They also have more overheads like staff, leases, electricity... like any business. Time costs are high for starters becase educated staff aren't always cheap. Although the proliferation of cheap labour from India might have something to say about that. I digress. Software is generally more expensive in offices (because it is has more functionality than a "home version") You are paying for years of training, knowledge and expertise. You are also paying a firm a percentage of profit (Why would they open, otherwise?). In saying that, most accounting firms probably write off money on Funds that insist on being done cheap.

Compliance for professional bodies (ie. internal review systems, preparation and archiving of workpapers) and administrative functions take up a lot of time. You just cannot skip it without risking potential professional indemnity claims being disregarded in the future or action taken by CPA or CA after one of their compulsory audit reviews.

By the way, it isn't the job of your Fund auditor to look at the tax return & the tax calculations in minute detail (and nor are they required to). They may take sampling of source documentation and look at the headline figures, but in the main it is a compliance function (has the Fund operated within the SIS legislation? has it operated within the rules of the Trust deed?).

I am sure there are more reasons. But that's why you can do your own Fund cheaper than I could in the workplace. You have far less hoops to jump through.

Click to expand...

With Simple Fund being used to maintain over 75% of all SMSF funds it’s interesting to hear your perspective. I have never found one of the anomalies you refer to, touch wood, but I do double check it.

I’m glad it is you that have to jump through hoops and not me and I take on board what you say is pumping up the costs. However in my view the industry is a long way from providing anything that resembles value for money. (However I’m sure there are exceptions)

Cheers.


ps

Simple Fund renewal fee on 1000 Fund license is $2717 or $2.71 per fund. Every fund over 1000 costs $1.82!

craft said:

With Simple Fund being used to maintain over 75% of all SMSF funds it’s interesting to hear your perspective. I have never found one of the anomalies you refer to, touch wood, but I do double check it.

Click to expand...

The way I believe it should be used and the way that most accountants use it may differ. It should be used as a convenient way of preparing reporting requirements for SMSFs. You should not have blind faith in accounting software because they will never be right all the time. You should always be checking the figures with an understanding of the tax legislation. Sadly, in the industry my experience is different to this. Take from this what you will.

You could produce the same content on an Excel spreadsheet fairly easily given the knowledge, but because of all the excess legislation (and audit compliance) requirements you will not find that this is possible as a solution in practice.

I’m glad it is you that have to jump through hoops and not me and I take on board what you say is pumping up the costs. However in my view the industry is a long way from providing anything that resembles value for money. (However I’m sure there are exceptions)

Cheers.

Click to expand...

I completely agree - I don't want to derail your thread. But with AMP and some of the other majors buying up firms and consolidating the SMSF industry regular accountants will need to deal with the "value proposition" more than ever over the next decade or two - otherwise they will quickly find themselves out of Fund returns to prepare. I am not sure whether it is the regulator, the legislation, the industry principles and professional standards - maybe it is all of these, but you are correct, why can't we prepare a simple set of Financials and Tax Return in a few hours?

I have to deal with this crap every day, and honestly I wish I could make a difference to it. But it isn't the only industry with these problems. I am not sure what it is like overseas, but costs in Australia for all services seem to be sky high in my eyes in terms of value.

ps

Simple Fund renewal fee on 1000 Fund license is $2717 or $2.71 per fund. Every fund over 1000 costs $1.82!

Click to expand...

Most accounting firms are lucky to have 50 SMSFs to prepare let alone 1000. My firm has about 400. 600 if you include "part admin" funds where we do the compliance check.

Ves said:

We don't use Simple Fund where I work. It's far from perfect - some of the numbers and tax calculations it spits out are wrong. That being said, for straight forward calculations it usually does the job.

Accountants charge so much because they (by rights) should pick up these anomalies. They also have more overheads like staff, leases, electricity... like any business. Time costs are high for starters becase educated staff aren't always cheap. Although the proliferation of cheap labour from India might have something to say about that. I digress. Software is generally more expensive in offices (because it is has more functionality than a "home version") You are paying for years of training, knowledge and expertise. You are also paying a firm a percentage of profit (Why would they open, otherwise?). In saying that, most accounting firms probably write off money on Funds that insist on being done cheap.

Compliance for professional bodies (ie. internal review systems, preparation and archiving of workpapers) and administrative functions take up a lot of time. You just cannot skip it without risking potential professional indemnity claims being disregarded in the future or action taken by CPA or CA after one of their compulsory audit reviews.

By the way, it isn't the job of your Fund auditor to look at the tax return & the tax calculations in minute detail (and nor are they required to). They may take sampling of source documentation and look at the headline figures, but in the main it is a compliance function (has the Fund operated within the SIS legislation? has it operated within the rules of the Trust deed?).

I am sure there are more reasons. But that's why you can do your own Fund cheaper than I could in the workplace. You have far less hoops to jump through.

Click to expand...

Thanks for the comprehensive explanation, Ves.
I think there's another factor that clients are prepared to pay for, and that's the shifting of the responsibility to a 'professional'.
Just from my own point of view, I'm prepared to pay for knowing someone is keeping up with all the changes in regulations and ensuring my Fund is compliant. I also appreciate that what I pay annually includes any and all questions/chats with my accountant on what are sometimes quite general questions.
So I consider what I pay my accountant absolutely value for money.

Julia said:

Thanks for the comprehensive explanation, Ves.
I think there's another factor that clients are prepared to pay for, and that's the shifting of the responsibility to a 'professional'.
Just from my own point of view, I'm prepared to pay for knowing someone is keeping up with all the changes in regulations and ensuring my Fund is compliant. I also appreciate that what I pay annually includes any and all questions/chats with my accountant on what are sometimes quite general questions.
So I consider what I pay my accountant absolutely value for money.

Click to expand...

+1

craft said:

That time of the year again. Sit up and watch the tour and do the superannuation return.

I use BGL’s simple fund to do the books. At this stage the books are not audited for 2011/2012 but everything balances.

The fund has two members both in accumulation phase for next 20 odd years. Only a very small amount of contributions/rollovers added this year. The fund is sufficient that we try to minimise contributions.

Even though this is an anonymous forum I’m choosing to keep balance private - to put the returns and strategy into context it should be sufficient to indicate that the fund is in excess of a million dollars. The combination of fund balance and time until access allows for an aggressive risk profile.

Strategy is basically to buy quality businesses at a price that I think makes sense and hold them for as long as the business continues to perform. If I can't find anything to buy at the right price I stay liquid and wait.

Cash & Interest rate securities currently stands at 13% of funds, the rest is invested in 9 Australian listed companies Not a lot of activity this year, one company sold in script offer and replacement is being sold down, some rebalancing of positions that have grown large and some accumulation of a couple of the other holdings.

2011/2012 results.

Gross Investment Return = 19.25%
(2010/2011 = 63.40%; 2009/2010 = 37.45%)

After tax and expense Return = 17.30%
(2010/2011 = 56.54%; 2009/2010 = 30.67%)

Due to unrealised gains there is a difference between tax expense and tax paid. This difference is accounted for as a ‘Deferred Tax Liability’ and is currently an additional $39,000 per Million of Net Assets that is available for investment. This amount is effectively a tax free loan from the tax office until a capital gains event occurs. If that event does not occur until after age 60 the tax office will kindly wave the liability.

Expenses:

Administration expenses including life insurance = .08% [$800 per Million of Net Asset]

Brokerage = .03% [$300 per Million of Net Assets]




Anybody else like to share their SMSF thoughts, strategies or results.

Click to expand...

My return has been very miserable Having said that I have been too busy making money to really look at my investments as much as I should have.

I am 65 percent cash and 35 percent shares. I havent bought anything for awhile and I putting all my company earnings and personal earnings in interest bearng accounts until there are some real bargains and this euro crisis is resovled. My accountant does everything for me quite cheaply as he does my super, company and personal returns.

Craft, would you care to share any specific successes you have had in what has been a very difficult year?

Ves said:

The way I believe it should be used and the way that most accountants use it may differ. It should be used as a convenient way of preparing reporting requirements for SMSFs. You should not have blind faith in accounting software because they will never be right all the time. You should always be checking the figures with an understanding of the tax legislation. Sadly, in the industry my experience is different to this. Take from this what you will.

You could produce the same content on an Excel spreadsheet fairly easily given the knowledge, but because of all the excess legislation (and audit compliance) requirements you will not find that this is possible as a solution in practice.


I completely agree - I don't want to derail your thread. But with AMP and some of the other majors buying up firms and consolidating the SMSF industry regular accountants will need to deal with the "value proposition" more than ever over the next decade or two - otherwise they will quickly find themselves out of Fund returns to prepare. I am not sure whether it is the regulator, the legislation, the industry principles and professional standards - maybe it is all of these, but you are correct, why can't we prepare a simple set of Financials and Tax Return in a few hours?

I have to deal with this crap every day, and honestly I wish I could make a difference to it. But it isn't the only industry with these problems. I am not sure what it is like overseas, but costs in Australia for all services seem to be sky high in my eyes in terms of value.


Most accounting firms are lucky to have 50 SMSFs to prepare let alone 1000. My firm has about 400. 600 if you include "part admin" funds where we do the compliance check.

Click to expand...

Hi V

Thanks for the picture from the inside - great insights. It appears from other responses I may be in a minority with my perception of value for money.

On the accounting theme and out of curiosity have you ever had a look at WHK Group?

Intrinsic Value said:

My return has been very miserable Having said that I have been too busy making money to really look at my investments as much as I should have.

I am 65 percent cash and 35 percent shares. I havent bought anything for awhile and I putting all my company earnings and personal earnings in interest bearng accounts until there are some real bargains and this euro crisis is resovled. My accountant does everything for me quite cheaply as he does my super, company and personal returns.

Click to expand...

IV

Thanks for sharing your approach for the past year. A good income and a subdued market should put you in a pretty good place when you find your bargains. How are you going to identify the right time/company to capitalise on your liquidity?

Craft, would you care to share any specific successes you have had in what has been a very difficult year?

Click to expand...

Trying not to be flippant – the most specific thing I have done to produce the return is just stay exposed to good businesses and not medal by trying to improve the return through trading.

Change in Market Value was 11.16% pre tax/expenses. The largest contributor to market revaluation was MMS at 5.8% . The largest detractor was DTL at negative 2.5% . 7 companies had positive revaluation 2 had negative. A financial year is really a pretty arbitrary period to measure results, so the revaluation figures are pretty meaningless. I concentrate on the cash flow (Dividend/Interest) return which was 8.08% on net assets and an awful lot higher on total contributions - the magic of compounding.

craft said:

Hi V
On the accounting theme and out of curiosity have you ever had a look at WHK Group?

Click to expand...

I hadn't actually. I honestly didn't realise they were listed. They have an office in Brisbane city.

I had a look at their financials on my lunch break. A breath of fresh air that they focus on cash profits. Their cash flow looks pretty steady. They are able to pay down debt and a relatively high dividend payout ratio from their FCF.

It seems that most of their revenue declines have been due to the drop-off in "consulting work." Clients are holding back on projects (and therefore advice on them). Consulting work is the cream for these firms. I have heard people senior to me commenting that the current economic environment is as bad as it has been for many years in respect of clients delaying payment of invoices (and bringing their work in) and being extremely fee conscious. This will show up in the margins when it improves. Compliance is the nuts and bolts and is low margin. You can see the decline in operating margins since 2008. They service high networth individuals and bigger business clients as priority. So in this sense they are a smaller fish in the big waters dominated by the Big 4. Possibly why their return on equity / ROIC has never been much higher than the cost of capital.

I will also note that many mid-sized practices (including regional and suburban) have seen a culture change towards the "value proposition" (which is accounting speak for trying to get more consulting work). They never used to chase it as hard, but firms are getting smarter with their marketing and image to accomodate this. The industry has changed a bit in this respect. It used to be more confined to the bigger firms.

All that said, I like accounting businesses. Mainly because the clients are generally pretty sticky. I also believe that they are sheltered somewhat from shock earnings events, their demise is generally a slow affair. You can pick it up early because it is usually due to poor cash flow management (keep an eye on tardy receiveables, increasing working capital requirements and the employee remuneration compared to revenue).

In a sense compliance work is a recurring revenue stream, since the same thing is done for the same clients (in most cases) year in year out. The main problem with compliance work is that clients do not see the value. As you previously stated yourself with your own affairs.

I probably prefer CUP in this sector because the practices that they own, whilst profitable, seem to focus on those clients who the Big 4 (and other bigger firms) don't chase. They're both priced pretty similarly on basic metrics and neither are absolute bargains, but perhaps slightly on the cheap side.

craft said:

IV

Thanks for sharing your approach for the past year. A good income and a subdued market should put you in a pretty good place when you find your bargains. How are you going to identify the right time/company to capitalise on your liquidity?




Trying not to be flippant – the most specific thing I have done to produce the return is just stay exposed to good businesses and not medal by trying to improve the return through trading.

Change in Market Value was 11.16% pre tax/expenses. The largest contributor to market revaluation was MMS at 5.8% . The largest detractor was DTL at negative 2.5% . 7 companies had positive revaluation 2 had negative. A financial year is really a pretty arbitrary period to measure results, so the revaluation figures are pretty meaningless. I concentrate on the cash flow (Dividend/Interest) return which was 8.08% on net assets and an awful lot higher on total contributions - the magic of compounding.

Click to expand...

MMS were a good stock for me a couple of years back. I havent had a look at them of late but then as I said I am not really looking at the moment.

My current holdings are BGL which has done reasonably. VOC which i am hoping will do better in the medium term. I am still holding FGE which I bought a long time ago and should have sold a few times but have kept. I also hold BHP, and ANZ. I havent really factored dividends into my return but am purely basing my return on any movement in share price.

However I am gun shy at the moment as i believe it is basically a short term traders market with all the uncertainty over the euro, China slow down, stuttering US recovery. I am prepared to get 5 percent until it appears there is a bit of a turnaround in market sentiment or a real good bargain comes along that cant be ignored.

I will look at the usual things, cash flow, debt levels, competitive advantage, outlook, good track record, management record.

I will have some spare time coming up as I have August off work so I will be sifting through the reporting season to see if there is anything that stands out as a BUY ME stock.

craft said:

Expenses:

Administration expenses including life insurance = .08% [$800 per Million of Net Asset]

Brokerage = .03% [$300 per Million of Net Assets]

Click to expand...

Appears the cheapest fund open to the general public is 'First State Super Personal Division' with a total expense ratio of .45% or $4,500 per million of net assets and that doesn’t include life insurance.

http://www.superguide.com.au/boost-your-superannuation/comparing-super-funds-check-out-the-cheapest-funds?utm_source=SuperGuide+Newsletter&utm_campaign=b304a8787d-Aug_2012_InvestmentPerformance_13_8_2012&utm_medium=email&gooal=eyJjaWQiOiJiMzA0YTg3ODdkIiwidGFnIjoiR29vYWxfVHJhY2tpbmdfMjE5ZjM3MzhiZCIsInVpZCI6ImRhNzE1NDFmYzM4ZDEzYjY5YWQwZTI3ZGQifQ%3D%3D|Z2J5ZUBiaWdwb25kLm5ldC5hdQ==


I'll take that as a tick for cost control on the SMSF.

$3000+ per million of assets, per annum, saved for 30 odd years, compounded at ---%...... ummm thats Big!

craft said:

After tax and expense Return = 17.30%
(2010/2011 = 56.54%; 2009/2010 = 30.67%)

Click to expand...

Looks like the top growth fund for 2011/12 was QSuper Balanced with a 6.4% return

http://www.superguide.com.au/superannuation-basics/top-10-performing-super-funds-20112012-year?utm_source=SuperGuide+Newsletter&utm_campaign=b304a8787d-Aug_2012_InvestmentPerformance_13_8_2012&utm_medium=email&gooal=eyJjaWQiOiJiMzA0YTg3ODdkIiwidGFnIjoiR29vYWxfVHJhY2tpbmdfMjE5ZjM3MzhiZCIsInVpZCI6ImRhNzE1NDFmYzM4ZDEzYjY5YWQwZTI3ZGQifQ%3D%3D|Z2J5ZUBiaWdwb25kLm5ldC5hdQ==

The average growth fund return was 0.5% whilst the average all growth(describes my approach) was – 2.5%

http://www.superguide.com.au/superannuation-basics/super-funds-returns-2011-2012-year?utm_source=SuperGuide+Newsletter&utm_campaign=b304a8787d-Aug_2012_InvestmentPerformance_13_8_2012&utm_medium=email&gooal=eyJjaWQiOiJiMzA0YTg3ODdkIiwidGFnIjoiR29vYWxfVHJhY2tpbmdfMjE5ZjM3MzhiZCIsInVpZCI6ImRhNzE1NDFmYzM4ZDEzYjY5YWQwZTI3ZGQifQ%3D%3D|Z2J5ZUBiaWdwb25kLm5ldC5hdQ==

Overall I think the results justify me continuing to manage the SMSF.

craft said:

Appears the cheapest fund open to the general public is 'First State Super Personal Division' with a total expense ratio of .45% or $4,500 per million of net assets and that doesn’t include life insurance.

Click to expand...

Still cheaper to do it yourself.

Yes, you are right sometimes it is cheaper doing it yourself