SMSF Returns

[sinner]

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.

Was trawling through a particular investing blog recently (the author is a long only FA type guy) and read a post from the end of Dec 2005.

http://www.crossingwallstreet.com/archives/2005/12/its-over.html

...At today’s close, the S&P 500 rose by 3.001% for the year (not including dividends). Also, Bill Miller’s Legg Mason Value Trust beat the market for the 15th straight year, although it was close. The fund returned 6.02% beating the S&P 500 with dividends by just 0.59%. ...

That caught my eye, I have heard of the Legg Mason Value Trust previously and thought I would pull it up. After all, beating the market for 15 straight years in 2005, wonder how it did from 2005-2015?



Now the comparison isn't perfect because it's not total return but the gist of the chart is that when the line is going up the Value fund is outperforming and when it's going down the fund is underperforming (not to show that LMVTX crashed out or anything).

Thought you might enjoy that one

 

[craft]

Thought you might enjoy that one

Hi Sinner

Yes the Bill Miller 2008 story where all the LMVT outperformance was given back is very interesting.

This is a descriptive article on it written at the end of 2008.

http://www.wsj.com/articles/SB122886123425292617

 

[craft]

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

This was from the opening post, still hopeful that some more people will chime in with their picture one day. In the mean time I’ll give a bit of an update as I have been thinking about the SMSF a bit following the Budget.

a core of index funds will be introduced to my SMSF over time.

This has been gradually occurring, I’m reasonably comfortable accumulating the index under 5000. Otherwise stock picking on valuation and business analysis grounds remains the predominant strategy.

Equity curve for this FY to date. (+15.5% vs XAO accumulation +1.1%)






The proposed budget changes have altered my long term strategy to an extent. I had planned to continue investing all possible funds in the tax free SMSF environment after preservation age until distributing excess to our retirement needs when I could no longer invest well, keeping the index fund proportion and distributing the rest. The distribution would be to our kids and to our Private Ancillary Fund (PAF).

Distribution of the excess will now be bought forward to preservation age. The intention was always to give the kids a set amount one day– They will simply get it earlier now. The PAF will receive the rest, effectively it gets the balance, but the balance will be less because of not being able to realise all capital gains in the zero tax environment and the earlier distribution, however I will continue to invest for the PAF as I did the SMSF for as long as I can.

 

[McLovin]

This has been gradually occurring, I’m reasonably comfortable accumulating the index under 5000. Otherwise stock picking on valuation and business analysis grounds remains the predominant strategy.

If you don't mind me asking, what sort of % of the SMSF is index tracking, and do you have a strategy on where it you want it to be or is it more about parking excess reserves when the index is priced right? Conversely, if the index goes above a certain point to you reduce your index exposure and go into cash?

FWIW, I don't put much into super, but my out of super returns, that have a market price, is 6.2% for the FY to date. The off market stuff I think I've done very well on, but I don't count my chickens...

 

[craft]

If you don't mind me asking, what sort of % of the SMSF is index tracking, and do you have a strategy on where it you want it to be or is it more about parking excess reserves when the index is priced right? Conversely, if the index goes above a certain point to you reduce your index exposure and go into cash?

FWIW, I don't put much into super, but my out of super returns, that have a market price, is 6.2% for the FY to date. The off market stuff I think I've done very well on, but I don't count my chickens...

Not going to trade the index – just accumulate when it doesn’t look to expensive and hold till we have to liquidate to make minimum withdrawals or the executor deals with it. Target (now) will be to have index holdings equalling tax free cap at preservation age. Obviously some assumptions in saying this but it won’t be a big % of the fund on that day. As of today Index holdings = 1.9% of the fund.

 

[McLovin]

Not going to trade the index – just accumulate when it doesn’t look to expensive and hold till we have to liquidate to make minimum withdrawals or the executor deals with it. Target (now) will be to have index holdings equalling tax free cap at preservation age. Obviously some assumptions in saying this but it won’t be a big % of the fund on that day. As of today Index holdings = 1.9% of the fund.

That's some long term thinking. Nice.

 

[Ves]

I'm at about 45% index (split roughly 63% VGS, 37% VAS as at today's prices) and 55% stock picking.

Rough long-term target is about 60-70% index 30-40% stock picking.

I initially did a sell down of some of the stock picking portfolio 18 months ago to start the indexing off.

Been topping it up with savings from my wage every six months or so ever since. It'll slowly get there.

I introduced an indexing component due to wanting more piece of mind after lack of confidence in being entirely self-reliant on my own ability.

If anything that theory has worked very well in practice, I don't care about market movements and would be lucky to check the prices once a week these days.

I always intended to back businesses for the long-term, unless my investment thesis was proved to be severely broken, and this has made it much easier to do it.

 

[craft]

I'm at about 45% index (split roughly 63% VGS, 37% VAS as at today's prices) and 55% stock picking.

Rough long-term target is about 60-70% index 30-40% stock picking.

I initially did a sell down of some of the stock picking portfolio 18 months ago to start the indexing off.

Been topping it up with savings from my wage every six months or so ever since. It'll slowly get there.

I introduced an indexing component due to wanting more piece of mind after lack of confidence in being entirely self-reliant on my own ability.

If anything that theory has worked very well in practice, I don't care about market movements and would be lucky to check the prices once a week these days.

I always intended to back businesses for the long-term, unless my investment thesis was proved to be severely broken, and this has made it much easier to do it.

I know how much you have thought about this - so no doubt it will suit you well over the long term.

In relation to VGS, I know we have talked previously about the merits of the international ETF being Australian Domiciled and I also went VGS for international component based on that discussion. But I have forgotten most of the reasons - any chance you want to detail it again so next time I forget I can refer back here.

Cheers
Cant Remember A .........

 

[fraa]

Been considering VGS vs US domiciled alternatives myself, I am not Ves but from what I read and assuming your alternative is USA domiciled vanguard funds

1. You lose 1 level of withholding tax paid from a US domiciled fund vs Aus that directly holds the underlying assets.

2. Estate taxes on Non Residental Aliens (i.e. aussie citizens) is very high compared to US citizens. Aussies have a tax treaty with USA that provides relief on this but if you are thinking very long term... well treaties can change.

3. Not sure if franking credits of the aussie portion of the international holding comes through the US domiciled fund ?

4. ASX CHESS vs broker name holding in US I believe ?

no. 2 can be avoided by using the Irish domiciled vanguard funds instead.

Are there any other differences (outside of explicit ones like MER, liquidity/spreads and who does the forex conversion ?). Wonder if I have missed anything.

I know how much you have thought about this - so no doubt it will suit you well over the long term.

In relation to VGS, I know we have talked previously about the merits of the international ETF being Australian Domiciled and I also went VGS for international component based on that discussion. But I have forgotten most of the reasons - any chance you want to detail it again so next time I forget I can refer back here.

Cheers
Cant Remember A .........

 

[Ves]

Re US Estate Taxes on US Domiciled investments.

I did a bit of research at the time, and it's a pretty complicated area. Wasn't 100% sure I had the answer, but my understanding of it was explained in private message I sent to you, craft:

The exemption threshold for the 2014 fiscal year for US residents on estate assets was $5.34m. Anything above is a flat rate of 40%.

http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States

Please note that this threshold and the tax rate are constantly changing & there is heaps of current debate. It is liable to keep changing.

My understanding is that the (1954) tax treaty between the USA and Australia means that we are allowed the same threshold as a US resident on any US based assets. I did read that document, but I can't remember where I found the bloody thing. There was a line in there that mentioned something along the lines of taxes levied on residents of both of those countries would be treated as if they were a resident of the country applying the tax.

There are also gift taxes. I don't think the US has exemptions for those to stop people from gifting assets before they die.

Also unsure if company / trust structures avoid the issue altogether.

I'm not 100% comfortable that this is the exact answer for individuals, and considering that the amount could potentially be big hit on the portfolio if I were to pass away after a very long and fruitful investing period I decided to limit my exposure to Australian domiciled ETFs (in particular VAS, VGS & VGE). It limits the options / flexibility for international exposure, but more peace of mind at this stage.

Would be very interested if you find anything else on this issue and if it influenced your thinking in ETF choice.

Cheers
Ves

At the end of the day, the extra complication with US domiciled assets, and some extra paperwork for US foreign tax credits, meant that I thought it'd be easier to go with the AU domiciled ETF.

I believe there was a lower Estate asset threshold for foreign residents, indeed as low as $60k in assets, if the US/AU tax treaty does not apply. Hence there is a fair bit of tax risk if the answer to the question is not correct.

I agree with fraa, they are very liable to change and I don't have the time to keep track of them, in what is essentially a passive investment option.

 

[hiddencow]

The proposed budget changes have altered my long term strategy to an extent. I had planned to continue investing all possible funds in the tax free SMSF environment after preservation age until distributing excess to our retirement needs when I could no longer invest well, keeping the index fund proportion and distributing the rest. The distribution would be to our kids and to our Private Ancillary Fund (PAF).

Distribution of the excess will now be bought forward to preservation age. The intention was always to give the kids a set amount one day– They will simply get it earlier now. The PAF will receive the rest, effectively it gets the balance, but the balance will be less because of not being able to realise all capital gains in the zero tax environment and the earlier distribution, however I will continue to invest for the PAF as I did the SMSF for as long as I can.

As I understand it you intend to take out everything above the $1.6m tax free pension limit, $3.2 if divided with your wife as well.
Would there not still be a benefit in keeping some excess in the accumulation phase being taxed at 15%?

 

[craft]

Re US Estate Taxes on US Domiciled investments.

I did a bit of research at the time, and it's a pretty complicated area. Wasn't 100% sure I had the answer, but my understanding of it was explained in private message I sent to you, craft:

Thanks Ves

That's exactly what I was after. Stupidly lost track of that post, should have filed it for reference.

 

[craft]

As I understand it you intend to take out everything above the $1.6m tax free pension limit, $3.2 if divided with your wife as well.
Would there not still be a benefit in keeping some excess in the accumulation phase being taxed at 15%?

Hi Hidden

For us, If I look at our intentions of what we want to do there doesn't seem to be much attraction with retaining above the 3.2M.

For estate planning purposes, the risk of leaving money in SMSF is that our kids will be non-dependant for tax purposes by the time we reach preservation age therefore any money going to them from the fund on our death would incur a 15% (+ 2% Medicare) death duty. And the PAF is tax exempt so any money channelled to that on death would also incur death duty.

Makes more sense to me to avoid the death duty, the kids can get some money in their 20-30's when it will be more useful to them and then maybe they won't be so eager for us to die.

The PAF is tax exempt so the earlier we can get money into there the better. In fact if we weren't locked into super I would switch funds surplus to our retirement needs straight away. But I'm not allowed so (according to most) I have to keep abusing the super system.

 

[Junior]

For estate planning purposes, the risk of leaving money in SMSF is that our kids will be non-dependant for tax purposes by the time we reach preservation age therefore any money going to them from the fund on our death would incur a 15% (+ 2% Medicare) death duty. And the PAF is tax exempt so any money channelled to that on death would also incur death duty.

Hi craft,

Is there an opportunity to manage the taxable and tax-free components in your Fund? Tax free component isn't subject to death duties.

Can potentially create more than one pension and draw down on the pension with higher taxable component first, depending on your situation.

 

[craft]

Hi craft,

Is there an opportunity to manage the taxable and tax-free components in your Fund? Tax free component isn't subject to death duties.

Can potentially create more than one pension and draw down on the pension with higher taxable component first, depending on your situation.

Hi Junior - thanks for the thought.

Tax free proportion of the fund is only 1.3%. We will both have the full 500K cap remaining. Doesn’t make much sense to me to make the non-concessional contributions now due to the proportioning rules on lump sums. So if nothing changes in the next 15 years until preservation age is reached we will re-contribute 500K each after taking the lump sum to at least shield a bit of the remaining 3.2 from Death Duties.

In hind sight we should have been maxing out yearly non-concessional contributions as a shield against the death duties. Oh well, live and learn. (or maybe we'll get a transitional free kick )

 

[leyy]

Im sitting at 8.36% return this financial year YTD including dividends (5.73% CG and 2.63% Dividend income).

previous financial year 14-15 I had a 8.40% return including dividends.

 

[hiddencow]

Your PAF would be a discretionary trust?

I would take advantage of your 500k NCC limits when you can immediately convert them to pensions. That way you can keep the non-taxable components at 100%. Just compound that at 30% until you die

 

[craft]

Im sitting at 8.36% return this financial year YTD including dividends (5.73% CG and 2.63% Dividend income).

previous financial year 14-15 I had a 8.40% return including dividends.

Well done levy - that's better than the accumulation index over that period. It would be nice to hear at some stage how you have gone about things.

 

[craft]

Your PAF would be a discretionary trust?

Not really a discretionary trust as such - A bit of an overview on this link.
http://australianphilanthropicservices.com.au/wp-content/uploads/2014/05/Private-Brochure.pdf

I would take advantage of your 500k NCC limits when you can immediately convert them to pensions. That way you can keep the non-taxable components at 100%. Just compound that at 30% until you die

 

[skc]

This was from the opening post, still hopeful that some more people will chime in with their picture one day.

This is my portfolio return since inception about 2 year ago. Red line is the XJOAI index. The return charted includes dividend and franking credits, but excludes interest and tax... so it's EBIT.



The portfolio currently has ~24 positions... 15 are "core" holdings while remaining ones are speculative. I try to keep transactions low, but I had a change of strategy about 12 months ago which resulted in a bit of turnover. I initially allocated ~40% of the funds to buy income stocks (REITs, utilities, infrastructure etc) whose dividends will more than cover the funds interest costs... but I had a change of heart when I thought the US rates cycle would turn up and affect this strategy negatively (I was wrong!).

The portfolio is housed under a discretionary family trust structure which improves the tax effectiveness somewhat. I don't actually have a SMSF as yet - my super balance is not large and it's simply sitting there in some sort of standard balanced fund. It is something for down the track (although the new budget changes may render it less attractive)... but I am just a bit too busy to want to do that right now.

Overall this is my first real attempt at being a long term investor... so whilst performance is good over the first 2 years, it really hasn't even brush on the potential of long term compounding yet.