SMSF Returns

[craft]

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?

You are right my holding period is not 12 years on average so some return is probably attributable to harvesting earning multiple changes and re-investing and into fresh undervalued opportunities. I never thought I could archive it in the first place so I have no expectation of it continuing. In a burst of ego driven overexcitement I have recently lifted my future expectations of a real 3% return after inflation, tax & expenses to 4%. The extra 1% real is what I think I can add long term for stock selection & portfolio management.

 

[craft]

I disagree.

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

Just to clarify - the 42% is 14/15 FY year return.

 

[craft]

162 Trades and NEVER losing 1R is mind boggling.

162 trades are the closed parcels for FY14/15. The performance statistics are for closed14/15 trades..


I don't use stops 1R for me is total wipe-out of the parcel - I have never held a stock when it has folded. Not last year not ever. But you can make many times your original investment. There is asymmetrical risk return inherent in holding good businesses long term.

 

[craft]

You take 14 trades a month yet hold on average 909 days---clearly showing that your trading inside your holdings

You have to get your head around doing things in multiple parcels - its not trading as such. For instance there's probably been 20-30 or more sell parcels of MTU, really only one deliberate action - to control portfolio concentration.

 

[craft]

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?

I have to clarify the 35% for 12 years - you got that from my post in May no doubt. Its the twelfth set of books so only 11 complete years of record. I over optimistically guessed 35% the actual after tax return is 31.6% so its already coming back from the 34% when I last posted the long term result for 9 years. The 13/14 FY return (which I must have forgotten to post) was barley break even at 0.52%

 

[hiddencow]

Thanks for the detailed responses craft. At the moment I've started to take advantage of concessional contributions to super. In the past I thought that by preservation age I would have compounded my wealth to a point where it wouldn't matter but the tax advantages are too much to ignore. I run the risk of having way too much in super and not enough outside but that will not be an issue as long as I have enough investments outside as well.

I'm aiming for something similar to you, but slightly different. 30 times expenses outside and then the rest in super. I figure that, every dollar that I won't need to meet my living expenses is better off compounding inside super instead of outside.

Any thoughts on what your after tax returns would have been if the portfolio had been outside of super?

 

[skc]

Craft this is phenomenal. Well done.

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

+100

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.

Thanks Craft... truely inspirational.

I am guessing that, if you were to detail the same set of statistics on a marked-to-market basis (which I understand is pointless in your strategy), it would be a lot less freakish?

P.S. If you ever start a managed fund can you PLEASE send me an application form?

 

[systematic]

I'm with the others, craft - you are the man.

From your perspective, could I ask how "systematic" or how subjective your approach is? I simply mean, how much of a process/checklist do you follow? Or perhaps; how easy or difficult would it be for you to teach your stock selection (including buying / selling process) to, say, your adult child or a best friend?

 

[craft]

Any thoughts on what your after tax returns would have been if the portfolio had been outside of super?

Interesting question

At a guess I would say 50% of return is dividend or short term capital gain subject to 15% tax rate and the remainder is long term Capital Gain subject to 10% so a effective tax rate of ~12.5% in the SMSF.

If your aim was to accumulate a decent amount outside super the logical tax structure would be a company (probably linked to a trust for distribution flexibility) so worst case tax rate would be 30% whilst accumulating and marginal rates when drawing down.

If we make the same accrual for tax on unrealised capital gains like is done in the SMSF then the after tax return outside super by my calcs would come down to 25.3% (31.6%/.875*.7)

100K compounded @ 25.3% for 11 years = 1.195Million.
100K compounded @ 31.6% for 11 years = 2.050Million.

The tax structure is very significant to the balance of the fund even if the difference in the after tax rates doesn’t seem that huge. If you add in the benefit of concessional contribution the effect would be even larger.

It’s worth also not forgetting that the accrued tax liability on unrealised gains will eventually be treated very differently – current legislation sees any liability forgiven in the SMSF when you move to pension phase, not so in the company, ie the true after tax return in the SMSF is probably higher than 31.6% depending on how much capital gain is eventually carried through to pension phase.

Eventually the capital accumulated in the company will have to be distributed at marginal rates in retirement. Currently distribution from super in retirement are tax free. (I suspect that can't & probably shouldn't last - at least not for large balances)

 

[craft]

I'm with the others, craft - you are the man.

From your perspective, could I ask how "systematic" or how subjective your approach is? I simply mean, how much of a process/checklist do you follow? Or perhaps; how easy or difficult would it be for you to teach your stock selection (including buying / selling process) to, say, your adult child or a best friend?

I'm not the man - I'm just me.

Its not systematic - It does involve judgement.

I learnt it so it can be learnt, I seriously doubt that I could teach it - communication doesn't appear to be my strong suit.

From what I have observed you have to have a pre-inclination towards long term investing before any of the concepts seem to stick. If you have this pre-inclination there is plenty of great information out there - dare I say it just start with Buffett.

 

[systematic]

I'm not the man - I'm just me.

Its not systematic - It does involve judgement.

I learnt it so it can be learnt, I seriously doubt that I could teach it - communication doesn't appear to be my strong suit.

From what I have observed you have to have a pre-inclination towards long term investing before any of the concepts seem to stick. If you have this pre-inclination there is plenty of great information out there - dare I say it just start with Buffett.

Thanks craft.

I'd assumed that what you do was definitely not "step by step" but rather involved subjective judgement. Was curious as how to far your "usual" or "initial" approach got you, before using judgement. Whether you had quick ways of short listing a group of candidates, for example - or not even that. My question is pure interest in how different investors think.

I could not do the approach that you do. I think that if a person can actually pull it off (as you have) - your approach can beat a purely systematic approach. That's why my hat is off to you

 

[craft]

I am guessing that, if you were to detail the same set of statistics on a marked-to-market basis (which I understand is pointless in your strategy), it would be a lot less freakish?

The open+close is not that dissimilar, but that is the point of long term investing - you can produce these sorts of expectancies. Obviously I can still **** the open expectancy up.

BUT what you haven't got with LT is the opportunities. The compounding is done internally by high and constant exposure to a few opportunities. traders will typically have lower expectancies but compound externally by taking advantage of many opportunities.


Nobody should read too much into the one year figures posted on this thread, I certainly don't, even the 11 year record is a bit short for my liking to draw conclusions from without reference to the expectations arising from the investment process.

P.S. If you ever start a managed fund can you PLEASE send me an application form?

If I ever decide to take on the stress and hassle of managing other peoples money you can be sure that I have lost my ability to make enough money from the market and have to resort to fee based income - As such, If I ever offer you would be best served to decline.

 

[rb250660]

I trade completely systematic using a system I wrote in Amibroker to generate my signals. For my FY14/15:

105 Trades
Compound return = 40.8%
Risk adjusted return = 219%

I use AustralianSuper to trade and it's a nightmare sometimes. When I have enough capital I will go the SMSF option.

 

[hiddencow]

Interesting question

At a guess I would say 50% of return is dividend or short term capital gain subject to 15% tax rate and the remainder is long term Capital Gain subject to 10% so a effective tax rate of ~12.5% in the SMSF.

If your aim was to accumulate a decent amount outside super the logical tax structure would be a company (probably linked to a trust for distribution flexibility) so worst case tax rate would be 30% whilst accumulating and marginal rates when drawing down.

If we make the same accrual for tax on unrealised capital gains like is done in the SMSF then the after tax return outside super by my calcs would come down to 25.3% (31.6%/.875*.7)

100K compounded @ 25.3% for 11 years = 1.195Million.
100K compounded @ 31.6% for 11 years = 2.050Million.

The tax structure is very significant to the balance of the fund even if the difference in the after tax rates doesn’t seem that huge. If you add in the benefit of concessional contribution the effect would be even larger.

It’s worth also not forgetting that the accrued tax liability on unrealised gains will eventually be treated very differently – current legislation sees any liability forgiven in the SMSF when you move to pension phase, not so in the company, ie the true after tax return in the SMSF is probably higher than 31.6% depending on how much capital gain is eventually carried through to pension phase.

Eventually the capital accumulated in the company will have to be distributed at marginal rates in retirement. Currently distribution from super in retirement are tax free. (I suspect that can't & probably shouldn't last - at least not for large balances)

Thank you for such a detailed and quality response. I have thought about using a trust and company structure to minimise tax but there are some downsides to it. Firstly the fees involved for 2 companies (1 a corporate trustee and one to hold investments) and a trust mean that a significant enough amount will be needed before it pays off. One also cannot move existing investments into a turst without triggering a CGT event so I cannot simply convert to the structure later. The second downside as that any investments in the company would not be eligible for the CGT discount. Investments would initially be in the trust so it won't matter much initially but dividends would be paid to the company where the money will remain and be invested. Also to note the corporate tax rate for small companies has been lowered to 28.5% so that provides a bit more benefit

Your example shows just how effective the low rates of tax in super are. This is why I have decided to maximise my concessional contribution even though I have many years left. Along with the initial benefit, it is too good to pass up. No matter how much I have in super though, I only consider it as a safety net as this stage as I intend to stop work a lot earlier than preservation age so will need enough outside of super. Since I am conservative I will aim for more than enough and it will likely keep compounding as well that by the time I reach preservation age, I can start thinking about other things than investments and tax.

So back to my thoughts on how to minimise tax and maximise returns outside of super. Without the tax benefits of super, I think switching investments for profit becomes a lot harder. Any decision to sell needs to be thought of as can the proceeds from selling minus any applicable tax buy something that has more value than what you are currently holding. For investments which have risen significantly, you may lose over 20% of the proceeds to tax even with discounted CGT. One has to be very confident in the value differential to give up 20%. This means a lot more holding and a lot less trading.

Once I am no longer working and if I choose to move away from Australia, it's possible to minimise tax very effective by living in a jurisdiction that doesn't tax foreign shares. For example one could live in Singapore and buy and trade shares on the ASX without incurring any CGT, in either country. You lose access to the franking credit but there is no withholding tax on fully franked dividends or conduit foreign income and Singapore doesn't tax it either. Effectively the only tax paid is the corporate tax by the company. Not quite as good as being in super pension phase with full franking credits refunded but you don't have to be 60 so that is a big plus. Super is unlikely to be so generous in the future either. Also if you invest in shares in other countries the corparate tax rate may be lower. The UK corporate tax rate is 20% and there is no withholding tax on dividends either.

Sorry to go off topic on your thread but would love to hear your thoughts on any other way to structure investments to maximise returns.

 

[DeepState]

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.

I have stayed pretty well fully invested for quite a while now.


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)

This is craft ...

Thing is I have made 10’s of Millions from very little in the market on purely a private account. Maybe subconsciously I just want acknowledgement from people who understand how difficult and I suspect rare that is (yet I had never quantified the amount before)

For the 2014/15 FY alone, the probability of a 47.1% year total pre-tax return outcome is crudely estimated at 0.5%.

On the basis of a fully invested, unlevered, buy-hold portfolio (days held average for realised positions is well above this period) with an effective diversification of 8 stocks (to allow for concentration into a smaller number of names within the portfolio) drawn from the ASX 200 which survived the year.

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.

Rinse and repeat, roughly, eleven more times. ASX 200 Accum 11 years to FY2014 compound approx 10% per annum, realised approx. 35% pa. Very very rough likelihood per year 2-5%. No more than 15%. Allows full rebalancing each year. Fully invested...

Happy journeys.

Indeed. Welcome back.

 

[Triathlete]

For the 2014/15 FY alone, the probability of a 47.1% year total pre-tax return outcome is crudely estimated at 0.5%.

On the basis of a fully invested, unlevered, buy-hold portfolio (days held average for realised positions is well above this period) with an effective diversification of 8 stocks (to allow for concentration into a smaller number of names within the portfolio) drawn from the ASX 200 which survived the year.

Are you able to explain how the above probability is calculated in simple terms...??? thanks in advance...

 

[DeepState]

Are you able to explain how the above probability is calculated

Yes.

in simple terms...???

Tough challenge...

Goes a little like this.

2,000 investors arrive at an ASF convention.

There is an urn at the front containing identically shaped and weighted balls (think like bingo) each with stock tickers and returns for the FY15 year, inclusive of dividends, written on them. Each of these tickers was a stock which was a member of the ASX 200 and been around for the full year. Hence only there are slightly less than 200 balls are in the urn.

Each investor takes a turn to select 8 balls from the urn whilst blindfolded. The straight average of these returns is taken. The investors are ranked on a league table.

Of these investors, only about 10 will have delivered a return higher than what Craft has reported for FY14/15.

------

The above is for a single year only. It becomes progressively more uncommon as more years of outsized returns are achieved. For example, and Craft has made no claims of this particular outcome, if this kind of result was achieved on a per annum basis for just two consecutive years, were we to line up the crowd attendance at the AFL Grand Final today (~100k), only about 3 to 10 of the spectators would be able to generate such a result (per annum, over the full two year period). Craft has produced outstanding returns relative to what has been available in the market on a fully invested, long only, unlevered, Australian equity universe over long period of time.

The use of 8 stocks and equally weighted is a way of approximating a portfolio with 10-15 stocks held with some concentration into a smaller number. If this number were concentrated even further to 6 (roughly meaning that there may be 15+ names in a portfolio, but 6 totally dominate), the number of people producing the back to back outcome above would be around 25-30, just to give you a sense of how important this assumption is to the picture.

Everything else is just assuming full investment with no leverage and a one year holding period, after which a new selection of X stocks is made. It is even harder to achieve this outcome if your holding period is constrained to be longer.

 

[Ves]

Hey craft

I'm not sure if relevant. But have you ever compared the underlying (weighted) P/E ratio of your portfolio to the ASX 200 or 300?

I'd be curious to see how this had tracked over time if you keep this data. A statistical experiment, if nothing else.

 

[craft]

probability

Lucky bastard aren't I - you know it, I know it - everybody should understand it. I have one outcome from a whole distribution of what I do could have resulted in. I think luckily to date I've got something quite high in that distribution. Might not be the case in the future and to mitigate that possibility a core of index funds will be introduced to my SMSF over time.

You only have to build it once if you don't wreak it.

 

[craft]

Hey craft

I'm not sure if relevant. But have you ever compared the underlying (weighted) P/E ratio of your portfolio to the ASX 200 or 300?

I'd be curious to see how this had tracked over time if you keep this data. A statistical experiment, if nothing else.

Sorry

Don't track it and don't have the inclination to work it out.