SMSF Returns

[Ves]

To be honest, I can count on the fingers on one hand the amount of clients that I have seen use CFDs in their SMSF, so my understanding of the rules is more from my memory of something I read a fair while ago! I am not sure whether that is the fact that the rules are fairly complicated in that environment, or people just don't see them as useful from a risk/reward perspective.

I'm a bit confused about the differences between the 56 and the 57 rulings. Then again I don't use CFDs and I am probably missing a small difference in how they operate.

Seems to be OK to have a CFD bank account, and be required to make further payments if you make losses, but not OK, if you have to enter into an agreement that forces you to reserve / guarantee further fund cash / assets that the CFD provider gains recourse over?

 

[McLovin]

Seems to be OK to have a CFD bank account, and be required to make further payments if you make losses, but not OK, if you have to enter into an agreement that forces you to reserve / guarantee further fund cash / assets that the CFD provider gains recourse over?

That's pretty much it. In the first instance (56) the creation of the cash account still makes the use of the CFD product non-recourse to the assets of the SMSF. In the second instance (57) a charge has been placed over the assets of the fund to cover losses whether or not they happen to be in the client's cash account with the CFD provider doesn't matter.

I imagine the distinction between CFD's and options and futures traded on regulated exchanges is that CFD's have far less visibility and transparency.

 

[craft]

That's pretty much it. In the first instance (56) the creation of the cash account still makes the use of the CFD product non-recourse to the assets of the SMSF. In the second instance (57) a charge has been placed over the assets of the fund to cover losses whether or not they happen to be in the client's cash account with the CFD provider doesn't matter.

I imagine the distinction between CFD's and options and futures traded on regulated exchanges is that CFD's have far less visibility and transparency.

Hi McLovin - you obviously know way more on this now than I do after killing a lazy day digging into it. But the point I was trying to make earlier and I still think it will limit the extent of use for even futures is the exposure limits in the investment strategy. ie 1 the Million account and 70% max set for equity exposure - means you would have to keep full face value exposure of the future contracts (+ any other equities the fund owns) under the 700K. or saying it another way you couldn't hold a couple of Million in future exposure just because you are able to fund it on margin. The non recourse rules might not pull you up in relation to futures but the investment strategy would and amending the investment strategy to allow for more than 100% exposure would not meet the obligations the legislation requires of an investment strategy to control and protect the funds financial position. If it sounds risky (ie a 2 million futures exposure in a 500K fund etc) you can be pretty sure you can’t do it in a SMSF.

But if the full face value of the number of contracts you want to trade is within your funds means and within the investment strategy asset allocation, then with a derivatives risk statement in place you should be able to trade to your heart’s content within the fund.

This is not advice - This is just a fool guessing.

 

[Ves]

This is not advice - This is just a fool guessing.

I believe that the APRA guidelines state that a Fund must make sure that the "net exposure" must is within the investment strategy bounds.

Whilst APRA is not the regulator of SMSFs, the ATO has never publicly stated anything that contradicts this. In fact I have never seen the ATO request to see a client's investment strategy in an audit or otherwise.

http://www.apra.gov.au/Super/PrudentialFramework/Documents/SPG-200-Risk-Management.pdf

Not to say that they won't. The ATO isn't interested until they're interested.

Here's a good summary by some trusted industry experts:

http://www.dbalawyers.com.au/smsf-compliance/can-smsfs-invest-derivatives/

 

[McLovin]

Hi McLovin - you obviously know way more on this now than I do after killing a lazy day digging into it. But the point I was trying to make earlier and I still think it will limit the extent of use for even futures is the exposure limits in the investment strategy. ie 1 the Million account and 70% max set for equity exposure - means you would have to keep full face value exposure of the future contracts (+ any other equities the fund owns) under the 700K. or saying it another way you couldn't hold a couple of Million in future exposure just because you are able to fund it on margin. The non recourse rules might not pull you up in relation to futures but the investment strategy would and amending the investment strategy to allow for more than 100% exposure would not meet the obligations the legislation requires of an investment strategy to control and protect the funds financial position. If it sounds risky (ie a 2 million futures exposure in a 500K fund etc) you can be pretty sure you can’t do it in a SMSF.

But if the full face value of the number of contracts you want to trade is within your funds means and within the investment strategy asset allocation, then with a derivatives risk statement in place you should be able to trade to your heart’s content within the fund.

This is not advice - This is just a fool guessing.

Yeah from reading around that seems to be the general rule. But then reading the link Ves provided there's this...

Accordingly, in a roundabout way, the legislation and the case law come to a similar conclusion as APRA. Namely, holding derivatives in an SMSF is allowable for purposes such as hedging against risks. However, they should not be used for speculative purposes and ‘speculative purposes’ cover a lot of purposes!

Taking that statement at face value would mean things like synthetic ETF's could be called derivative speculation, it certainly would make trading futures a no go. It seems like they've taken a pretty narrow view, maybe too narrow?

ETA: This is from Australian Super, which appears to be "speculation" based on the above definition ie they're using index futures to make the portfolio seem like it's 100% invested...

Our Australian and International Shares portfolio hold share index futures. With a small percentage
of these portfolios held in cash to cover transactions, inflows and outflows, index futures are used
to provide the equivalent returns as they would if they were 100% invested, while still holding cash.

http://www.australiansuper.com/~/me...tment/Fact sheet Derivatives_an overview.ashx

 

[craft]

But then reading the link Ves provided there's this...

And also this.

APRA agrees that derivatives can play a role in a properly diversified portfolio. They set out their views in Prudential Practice Guide SPG 200. Importantly, APRA state that they consider:…

it inappropriate for trustees to use derivatives for ‘speculation’, which … refers to investment activity that results in one or more of the following:

a. the net exposure of the fund to an asset class being outside the limits set out in the fund’s investment strategy. (Net exposure is exposure taking account of both physical and derivative exposure);

b. the risk involved for the whole portfolio being outside that which the trustee considered appropriate when it developed and approved the fund’s investment strategy;

c. the fund holding uncovered derivatives; and

d. the fund’s total portfolio being ‘geared up’ through derivatives to circumvent the limitations imposed by ss. 67, 95 and 97 of the SIS Act on borrowings.

Naturally, APRA is not the regulator of SMSFs. The Commissioner of Taxation is the regulator of SMSFs. However, the Commissioner has not released anything as directly on point as APRA’s guide. Also, the Commissioner typically tries to be consistent with APRA. Accordingly, APRA’s comments should be borne in mind. - See more at: http://www.dbalawyers.com.au/smsf-compliance/can-smsfs-invest-derivatives/#sthash.0WkWWBUe.dpuf

a b & d are directed towards what I was saying about staying within the funds means and strategy on the long side. c seems to indicate that a net short position would not be allowable. What c, really does is make futures only useful for hedging on the short side.

I don't see the above casuing problems with gaining exposure via futures rather then directly as Australian super has done in your example.

All in all - I would hate to be the poor sole that inadvertently gets dragged into a test case that determines where the line between speculation and investment lies. The legislators and regulators want SMSF's to be run very conservatively - probably better boundaries to push out there then these ones.


which is the same conclusion in the document.

Conclusion
It is possible for SMSF trustees to hold derivatives. However, derivatives should only be used conservatively and not for purposes like speculation. If a financial planner has a client who wishes to speculate using derivatives, this will expose the financial planner to risk. - See more at: http://www.dbalawyers.com.au/smsf-compliance/can-smsfs-invest-derivatives/#sthash.0WkWWBUe.dpuf

 

[McLovin]

I don't see the above casuing problems with gaining exposure via futures rather then directly as Australian super has done in your example.

Yes, you're right. I was thinking speculation in this instance was anything other than hedging.

 

[craft]

more importantly I feel my portfolio is now the most undervalued (relatively) that it has been since 2007 - so good stored energy - but when will it be released?

Looks like the stored energy talked about in that last equity curve update might be starting to release.





This will probably be the last update I will make here.


The 12th set of financials for the SMSF will be produced in a bit over a month. CAGR on total funds over that period is still likely to be 35%+ and with 16 years to preservation age. The snowball is starting to get ridiculous, I having trouble dreaming big enough and I don’t want the responsibility – Just some family financial security is all that we were trying to achieve.

 

[VSntchr]

Looks like the stored energy talked about in that last equity curve update might be starting to release.

The spring is doing it's thing, and yet it's only autumn!

This will probably be the last update I will make here.

The 12th set of financials for the SMSF will be produced in a bit over a month. CAGR on total funds over that period is still likely to be 35%+ and with 16 years to preservation age. The snowball is starting to get ridiculous, I having trouble dreaming big enough and I don’t want the responsibility – Just some family financial security is all that we were trying to achieve.

As I have said previously, inspirational.

Good work mate.

 

[craft]

Finally stoped procrastinating and did the books in Simplefund 360. What a heap of Crap!!! at least in comparison to the original desktop version.

I think I might have to retract this post somewhat – Simplefund 360 is still not as good as Simplefund desktop but the transaction automation now things are up and running is really nice. It’s very pleasant to get to the end of the year and have everything automatically up to date. All that is then required is a quick review, the pressing of one button to create end of year entries, and an email with the log on credentials to the auditor - Job Done.

Software renewal cost $198.00

 

[craft]

This will probably be the last update I will make here.

I'll close this out with a final FY update.

FY14/15 return was 47.1% before tax 42% after tax although the difference between these two number to a large extent won’t be paid to the ATO any time soon as a lot of it stays in the fund as deferred tax liability until long term positions are sold.

This is what the performance statistics of the closed trades looks like for this fund this year. Each individual parcel is counted as a trade. So the 162 trades is indicating more the multiple parcels nature of entries and exits rather than a high turnover of the portfolio.

 

[peter2]

Craft: You have done a remarkable job this year, well done.

There's no doubt about it. You're doing something different. Traditional portfolio management techniques won't get anywhere near this performance.

I'm surprised by the number or transactions and therefore assume that you are taking advantage of price rallies to sell some and then wait for the dips to buy some back. This would see you realising profits and having cash to buy in the dips.

I see that you only trade a small number of stocks that you know well. Considering the price movements in SRX this year, you've probably had a very interesting year.

I'd love to learn a little more if you would like to share.

 

[craft]

Craft: You have done a remarkable job this year, well done.

Thankyou and return compliments to you on your momentum/trade management threads.

I'm surprised by the number or transactions

The fund has grown large so it generally takes multiple parcels to get a job done in the stocks that I tend to invest in; the software counts each parcel as a unique trade for calculating the performance statistics. So the 162 trades probably only relate to a couple of dozen specific actions.

and therefore assume that you are taking advantage of price rallies to sell some and then wait for the dips to buy some back. This would see you realising profits and having cash to buy in the dips.

Not really I have stayed pretty well fully invested for quite a while now – Dividend stream is a source of ongoing liquidity however buys and sells are normally valuation vs price driven as opposed to liquidity for timing. I do have maximum exposure of 25% (marked to market) for the SMSF that causes some non value specific forced selling – MTU has been subject to this. I have participated in the DRP and re-brought based on my estimate of value, but it’s not an attempt at timing. MTU has bumped its head against the exposure limit many times this year causing quite a few transactions to exit and redeploy funds elsewhere. A similar thing happened with SRX with amazing outcomes because of the volatility but it’s not held in the SMSF.

Sometimes if something is reasonably fully valued and I think I can see a near term catalyst for price correction I may do a little speculative selling in anticipation – but the fully valued pre-requisite must be there before I will try this on – I won’t risk getting too smart on something undervalued that I want exposure too.

I see that you only trade a small number of stocks that you know well.

Yep I tend to stick to a pretty small number of stocks. In fact I have a min 10(when fully invested) and Max 15 rule for the SMSF. I tend to think of my portfolio as a team and I’m the selector – new stocks have to force themselves in by being better businesses then already in the team. Although separate to this I do pick up small quantities of stocks that have the potential to make the top 15. I research better once I have even a small position – mostly they get put back down again after a bit of a feel (accounting for a few more transactions)

Considering the price movements in SRX this year, you've probably had a very interesting year.

Very interesting but not held in the SMSF - the range of possible out comes when I purchased SRX was too wide for SRX to make the SMSF team - However in hindsight (as I sit here doing my personal tax return - thanks for the distraction) I would have loved the 10% CGT rate just now.

There's no doubt about it. You're doing something different. Traditional portfolio management techniques won't get anywhere near this performance.

The process is the ultimate cut you weeds water your flowers. You can get high multiple R wins. (MTU for example is being trimmed at around a 20 Bagger) The risk is asymmetric as your max downside is 1R (I’ve never had a 1R loss by the way) you never have to react to price calling you offside. When you’re reacting to business performance as opposed to reacting to price it’s not that hard to flatter a good win/loss ratio with a decent win% and voila the highest expectancy I know how to generate and it’s scalable to boot. But there are substantial risks if your business analysis is not up to scratch of getting deep into the doo before you realise - No price stops for protection here.

I don’t think I’m doing anything startling – Just a long term focus on business performance. But I guess that does put me in a minority as most don’t see the businesses for the prices.

Cheers

 

[kid hustlr]

Craft this is phenomenal. Well done.

I knew you were the man but to this extent I was unaware.

Just so I'm spelling it out correctly:

121*17808 = $2,154768
41*766 = $31,406

Return = $2,123,362 in FY 14/15

Is that correct??:bonk:

 

[craft]

Craft this is phenomenal. Well done.

I knew you were the man but to this extent I was unaware.

Just so I'm spelling it out correctly:

121*17808 = $2,154768
41*766 = $31,406

Return = $2,123,362 in FY 14/15

Is that correct??:bonk:

For closed positions yes - But for all you know I may have equal loses still in open positions so you shouldn't really draw too many conclusions. I won't be putting up open+close statistics because cleaver calculators like you could deduce to much that I would prefer to keep private.

 

[hiddencow]

12 years at over 35% returns, that is amazing. Can I ask if there a few stocks which have been responsible for the majority of those returns? If you took out the too 3 performers, what would your returns look like?

You mentioned you haven't been adding much money to the funds since the rollover. Do you have holdings invested outside of super then? I have many years left to preservation age so I am still trying to balance things. Any insight to how you manage it would be great.

If you had been contributing all these years and generating those returns, you would make Don Argus look small.

 

[craft]

Can I ask if there a few stocks which have been responsible for the majority of those returns? If you took out the too 3 performers, what would your returns look like?

Probably pretty ordinary – but you can’t help but have a top three.

The 80/20 principle is alive and well in my portfolio. The top three holdings currently represent 56% of the portfolio and 81% of the open profit.

The top three represent luck – I did not envisaged when buying them that they would do better than my other picks.

I don’t have to do much to manage the ones I get lucky with – I think to the extent that I possibly add anything beyond luck, it’s in the ongoing management of my picks that don’t turn out to be so lucky and running a strategy that holds tight to a business whilst it remains a good businesses.

I'll get back to the rest of your question later.

 

[tech/a]

I don’t think I’m doing anything startling – Just a long term focus on business performance. But I guess that does put me in a minority as most don’t see the businesses for the prices.

I disagree.

This has to be the best long term trading result I've EVER seen anywhere by anyone. 42% after tax is stellar.

162 Trades and NEVER losing 1R is mind boggling.
That means EVERY SINGLE trade you take either a new position or adding to an old one (majority)---never pulls back 1R from your entry
You take 14 trades a month yet hold on average 909 days---clearly showing that your trading inside your holdings
and really well. What I find truly amazing is that not one entry falls below 1R. So the initial entry doesn't nor do any additional entries.
The only solution my pea brain can come to is you don't have stops.
Your timing in and out to build the return is astounding. Reflected by the 75% win rate.

I really like the way you've structured the internals --- Pareto principal usage 75/25 is pretty close.
The constant attention to the portfolio.

While you attribute a lot to luck I don't think its ALL luck.
Clearly its very sound management.
Its milking profit out of excellent performers which you ORIGINALLY identified.
Just because they out performed your expected performance doesn't make it luck.
To my mind it makes it opportunistic. Also un canny that you've been able to continue to hold these rather than cull them as they have reached a valuation you expected---hard to do particularly if they pull back.

Really has me ( and many others ) thinking.

No price stops for protection here.

If you've not taken a 1R hit are you saying that you don't apply any stops?
I must be reading this wrong---you achieve this with absolutely no stops and your average win loss ratio is 23.2:1
That---is---beyond freak.

If I'm off the mark can you explain.

 

[hiddencow]

Probably pretty ordinary – but you can’t help but have a top three.

The 80/20 principle is alive and well in my portfolio. The top three holdings currently represent 56% of the portfolio and 81% of the open profit.

The top three represent luck – I did not envisaged when buying them that they would do better than my other picks.

I don’t have to do much to manage the ones I get lucky with – I think to the extent that I possibly add anything beyond luck, it’s in the ongoing management of my picks that don’t turn out to be so lucky and running a strategy that holds tight to a business whilst it remains a good businesses.

I'll get back to the rest of your question later.

A lot of it is luck with ending up with those extraordinary ones but you have stacked the odds in your favour by choosing good businesses. Still, your return is out of this world. You've mention various times that your style is to buy good businesses and hold them. In the long run though, I would not think it would be possible to sustain those levels of returns unless you sell out and invest the proceeds again. No business can keep pumping out 35% growth in the long run. You've managed to do it for 12 years now though, do you think you could sustain it into the future?

 

[craft]

You mentioned you haven't been adding much money to the funds since the rollover. Do you have holdings invested outside of super then? I have many years left to preservation age so I am still trying to balance things. Any insight to how you manage it would be great.

We originally set a target of 30 times ordinary earnings to accumulate in Super. We got started early and had 40years to achieve it, we made an assumption of 3% real return. (ie return after wage inflation, tax & expenses) From there it’s just a PV calculation to work out the required % of ordinary earnings needed to be contributed each year. We made the appropriate contributions until it become obvious we had made a mistake on the rate of return at which point we reduced and have now stopped contributions (except for a small amount of super guarantee which is left in an index option in an industry fund, we don’t bother rolling it into the SMSF) – whilst I think reasonable savings in super will retain their favourable tax treatment, excessive amounts will constantly be under attack, so I don’t see any benefit in adding further. In hindsight we struggled harder than necessary to make those early contributions but who knows how things are going to turn out.

I don’t think people should be too scared of legislative change in super. Set a reasonable goal, pick a realistic target return and make the appropriate contributions – leave the rest out of super.

I’ve got 16 years left until preservation – If they massively change the rules in that time I might change my opinion.