SMSF leaders

Further to the post on SMSF underperformance from yesterday, there is an index that has been constructed from the holdings of the best performing SMSF equity holdings. There’s also an ETF based on the index. The rationale is that although the typical SMSF equity portfolio does poorly, there are some that do better than average, and the researchers at Monash found that there was some persistence of the returns of these portfolios. The index is constructed from the holdings of these best performing funds.

Unfortunately, the ETF has also underperformed the market by 2.94% per annum since inception in 2019, which is almost exactly the same as the underperformance of the typical SMSF over the longer term. While two years of performance is not long enough to validate an investment strategy, it is not supportive of the investment thesis. More details on the ETF are here.

It’s quite common for an investment strategy that looks good in historical analysis to perform poorly when introduced to the broader market. In quantitative research its common to split your historical data into two periods and use the first one to develop your model and the second to estimate its effectiveness (known as “in sample” and “out of sample” performance respectively). Machine learning projects commonly split their data sets into three sets (training, validation and test sets), but the idea is the same — dividing the data to help mitigate the risk that your model is overfitted and only works well on the test data.

It’s even harder with investment strategies, because none of the data are truly independent. They are all driven by the market dynamics and economic environment that occurred at the time. So when we’re researching investments a key question for us is “what drove the historical performance of the investment, and is it likely to continue?”

We review a lot of portfolios which contain investments that have outperformed their markets. Usually these portfolios will have a number of investments that are driven by similar themes, like falling interest rates and increased risk appetite. But, much like a portfolio should be rebalanced back to its strategic asset allocation, normally we recommend rebalancing the investment styles to those that offer more opportunity for future returns, rather than betting that future is a repeat of the recent past.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

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