What's your return?

Financial year end means it's time to gather information together for your tax return, which I think means it's also a good time to review your investment portfolio goals and returns and compare them to others. Did your portfolio meet your objectives? While return is important, so too is risk, income, ability to sleep and live well and given past share market losses, capital preservation should be high on everyone's agenda. How do you assess whether your returns were acceptable? Are you like a fund manager and assess performance over and above a benchmark?

This article reviews and compares a number of performance measures.

To start, as most of you have self managed super funds (SMSFs), let's have a look at super fund performance. Table 1 below shows the returns of the top five growth and conservative growth funds over the last year as published by Chant West.

BUSS (Q) Defensive was the leading Conservative Growth Risk Profile fund (meaning its percentage allocation to growth assets were between 21 and 40%). The fund returned a very good 7.2% for the year. The CBA OSF Mix 30 was second with a 7.0% return. This fund has proven itself over the years; ranking first in terms of returns over five years returning 5.2% and also first in ranking over seven years with a 6.3% return. Vision super was third with 6.6%; Equiquip Conservative forth with 6.2% and Recruitment Super Stable fifth with 5.9%. These are reasonable returns.

ESSSuper Growth was the leading Growth Risk Profile fund (with a growth allocation of 61 to 80%). The fund returned 5.1% for the year, which given the volatility and flight to low risk defensive assets was not bad. Second was BUSS (Q) Balanced Growth again with 5.1% and third Health Super MT Growth with 4.9%. What's interesting is that of the 61 funds reviewed 38% (more than a third) had returns of 1% or less and 10% had negative returns. Investors in these funds are going backwards  not even covering inflation and while many will scoff at the very low yields on Commonwealth government 3 year bonds of 2.28%, it's better than the returns of 70% of the Growth Risk Profile fund performance in the last year.

The additional risk investors have taken in the last seven years by investing a greater allocation into high growth hasn't, judging by these tables, paid off. The best performing Growth risk profile fund over seven years was CBA OSF Mix 70 returning 6.7% or just 0.4% more than the best performing Conservative Growth fund.

Drilling down into specific asset classes, let's have a look at the actual returns for FY 2012 by asset class:

• Government bonds 24.78% - 10-year Australian Commonwealth Government bond (ACGB 5 ¾ 2021)
• Bank deposits 5.97% - FIIG Securities Australian Term Deposit Index
• Senior debt 9.94% - UBS Credit Index
• Listed hybrid securities 4.51% - Elstree Hybrid Index (data from 1 July 2011 - 30 April 2012 only)
• Equities (7.00%) - Australian All Ordinaries Index

The FY 2012 actual results are shown in Figure 1 below are compared and contrasted against hypothetical long term average returns based on the principle that investor returns should rise with an increase in risk.

Figure 1

Government bonds have significantly outperformed with international investors seeking high returns for very low risk, pushing bond prices up. On the flipside, the higher risk asset classes have underperformed (including property, although this isn't shown on the graph above).

I'm very much of the view that there will be attractive investments in any asset class at any particular point in time, but the last five or even seven years have shown that defensive assets have generally outperformed higher risk investments. The million dollar question is where to from here? If only I had a reliable crystal ball!

I think recent historical data emphasises the importance of:

1. Diversification and the need to include less risky asset classes in your portfolio no matter what the economic circumstances
2. Low risk asset classes have the capacity to outperform in low or negative growth scenarios
3. Not being a forced seller in an underperforming asset - supporting the need to diversify
4. As you get older you can't afford to invest all your capital in growth assets, you simply don't have the time to recover capital losses

No matter how you determine the goals of your portfolio, there should be a minimum capital preservation requirement. Naturally there'll be a return percentage but you really need to assess your tolerance for risk and capital loss, those higher returns usually mean a higher risk of loss.

You need to ask yourself if your portfolio has met your target returns and if not, ways you can achieve the desired results. There are lots of options besides cash and equities and fixed income which sits between the two in term of risk and reward offers a very broad range of options. FIIG currently has over 200 bonds available in smaller parcels sizes from $50,000 with yields to maturity or call of between 2.25% for Commonwealth government bonds to 13% or more for offshore Tier 1 hybrids.