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My SMSF in 2022: the good, the bad and the lucky

Stop whinging about investment performance in 2022. Every market analyst starts the year with a summary of the previous 12 months, and descriptions of 2022 vary from brutal to terrible to disappointing. Among many examples, fund manager Roger Montgomery, mainly an Australian equity investor, started his first newsletter of 2023 by saying:

“Many commentators point to the 12 months to December 2022 as being one of the toughest annual periods for the performance of the share market and the bond market for several decades.”

Morningstar's Director of Personal Finance, Christine Benz, who has more of a US focus, wrote:

"This past year was likely an unnerving one for many retirees. Amid soaring inflation and rising interest rates, stocks and bonds both ended the year with double-digit losses, marking their worst simultaneous decline in more than 50 years."

Not much love there, but was it really so bad for Australian superannuation?

Expectations need a reality check

In fact, including dividends, the broad S&P/ASX200 index rose 1.9% in 2022, and many active equity managers performed well. According to the latest VanEck Australian Investor Survey, 70% of investors plan to increase their allocations to Australian equities in 2023, and what matters most to local investors is local equities.

While US investors saw their broad S&P500 index fall by 18% and the Bloomberg Aggregate index of investment-grade bonds lost 13%, there were plenty of opportunities to avoid the gloom for Australians. Chant West reported in mid-December 2022 that the median superannuation growth fund was down 4% for the year, hardly a disaster. The top five managed funds in the Morningstar database were all up over 30% in the last year.

The Standard Risk Measures for Australia show the number of annual negative periods expected over any 20-year period for major asset classes. For equities, the number is '6 or greater'. At least 30% of years should show stockmarket losses. Investors not prepared for equity market downturns once every three years are in the wrong investments.

Yes, there’s a lot of red in Ashley Owen’s (of Stanford Brown) chart below for asset class performance in 2022 but look at all the green for 2021. While everyone moans about the S&P500 losing 18.1%, it was up 28.7% the year before, giving a respectable two-year return, despite everything that has hit the market.

Much of what was lost in 2022 was giving back the exuberance of 2021 and previous years. Did bond investors believe interest rates would stay at zero or negative forever? Did the valuations on tech stocks deserve to stay lofty and priced for perfection in all market conditions? While some fund managers looked like geniuses riding out the pandemic in 2020 and 2021, many then misread conditions and took little off the table as the market switched from growth to value. On another side of the same coin, plenty of fund managers outperformed as markets corrected. Check Lazard, GQG, Merlon, Allan Gray, Talaria, PM Capital and Katana among many for strong 2022 results.

Limits to fixed rate bond losses in SMSFs

In the portfolios of SMSFs, long-term fixed rate bonds do not feature prominently, and it’s unlikely bond losses were significant. The latest SMSF asset allocation data from the ATO (produced with a lag and dated 30 June 2020) shows cash and term deposits comprised about 21% of assets, and income from these rose significantly over 2022. Property gave some of the 2021 gains back in 2022 but depending on who was managing the equities and the domestic/global mix, it may have been a decent year. SMSFs are overweight Australian equities relative to global.

Investors who bought into crypto and NFTs on the back of celebrities like Matt Damon telling them that ‘Fortune Favours the Brave’ have experienced a reality check. Here are the words of Damon's commercial:

“And in these moments of truth, these men and women, these mere mortals - just like you and me - as they peer over the edge, they calm their minds and steel their nerves with four simple words that have been whispered by the intrepid since the time of the Romans: Fortune favors the brave.”

Investing rubbish. I’m looking forward to the new ad: ‘Fortune Favours the Diversified.’

Market timing versus risk management

There is a difference between hopeful market timing and considered risk management. Any number of studies show investors struggle to identify market entry and exit points, and as Vanguard’s Jack Bogle said:

“The idea that a bell rings to signal when to get into and out of the stock market is simply not credible. After nearly 50 years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.”

And Peter Lynch, who as manager of the Magellan Fund at Fidelity Investments in the US for 13 years from 1977 delivered double the returns from the S&P500, said:

“Thousands of experts study overbought indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply … and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.”

While I agree with these thought leaders, every person needs to set up a portfolio which suits them personally, to meet their goals and to marry with their appetite for risk. When I signalled to Firstlinks readers at the end of 2021 that I was reducing my exposure to equities, it was less a market timing exercise than a desire to preserve capital. I turned 65 a few weeks ago, and while I might live another two or three decades, my focus heading into 2022 was hanging onto my SMSF’s assets rather than stretching for another year like 2020 and 2021. On 8 December 2021, I wrote:

“I am starting to reduce some equity exposures as I personally believe the market will experience a decent fall sometime in 2022.”

So just as the market legends eschew market timing, so they also encourage investors to adopt a plan and a discipline and not take risks that might compromise their goals. The father of value investing and mentor to Buffett and Munger, Benjamin Graham wrote:

“The best way to measure your investing success is not by whether you’re beating the market but whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.”

A phrase adopted by Nobel Laureate, Daniel Kahneman, is that the key to good investing is having “a well-calibrated sense of your future regret”. 

These words provide a context for reviewing 2022.

Delving into my SMSF performance for 2022

No decision made now can change past returns, and the only thing that matters for the future are the buy, hold or sell investments made from this day forward. But looking at the past for lessons can inform the future, both for investment decisions and risk appetite.  

Despite no new contributions into our SMSF and drawing the minimum pensions for me and my wife, the total balance in our SMSF increased over 2022. Let’s take a quick look at a few of our investments.

The Good

When switching some money out of equities in late 2021, the investment choices were not exciting. The Reserve Bank of Australia did not start increasing cash rates until 4 May 2022, a poor judgement by Governor Philip Lowe who was at least six months late in moving to control inflation. The cash rate was only 1.35% by July 2022.

Bank hybrids and corporate floating rate notes paying a margin above BBSW offered better defensive appeal. Not only did they generate some cash flow, but the income would rise with the cash rate. Hybrids were purchased at varying margins around 3% depending on price opportunities over many months. Money was also allocated into a range of unlisted hybrids and notes, a senior bank debt fund (ASX:QPON), a subordinated debt fund (ASX:SUBD) and various listed corporate floating rate notes (such as Centuria's ASX:C2FHA and CVC's ASX:CVCG). 

Less flattering, a listed fund that invests in floating rate bank capital instruments, ASX:GCAP, produced good income but our investment shows a small capital loss. Our average entry price was $9.27 and it is now trading at $9.05 after a recent recovery.

Source: Morningstar

Three-month BBR is currently around 3.3% (and heading higher) and with margins above that, the income is far higher than anything seen for years. Of course, inflation is also higher and real returns are flat.

These investments down the bank capital structure come with more risk than deposits, but there is reward for risk in a strong Australian banking system. In the deposit market, to increase returns on cash, investments were placed in ASX:BILL and higher-yielding cash accounts.

Listed infrastructure has also held ground despite rising rates, including positions in Argo's ASX:ALI and to a lesser extent, Magellan's ASX:MCSI.

Source: Morningstar

As we moved beyond the first quarter of 2022, with demand for resources looking strong, exposure to Mineral Resources (ASX:MIN) looked worthwhile given its stake in iron ore and lithium, and industry stalwart ASX:BHP offered potential. Two resource LICs, Tribeca’s ASX:TGF and Lion’s ASX:LSX, were both trading at a large discount to NTA which seemed to offer added upside potential.

The Bad

While I was generally lightening the load on equities, I still wanted exposure to the growth and dividend potential of good companies. I like the concept of a core/satellite portfolio - where cost is minimised in index (or near index) funds, such as ASX:A200 (with a cost of only 7 basis points, or 0.07%) and a broad LIC available at a discount such as the Djerriwarrh ASX:DJW – while backing some active managers for potential outperformance. For reasons described in the next section where I exited direct holdings in many tech companies, I decided to build a position with a few equity growth managers.

These managers included listed vehicles from Hyperion (ASX:HYGG), Munro (ASX:MAET), Loftus Peak (ASX:LPGD) and Hearts & Minds (ASX:HM1). Presentations by these managers were impressive. For example, Hyperion was Morningstar’s Fund Manager of the Year in 2021 with outstanding long-term results. Hearts & Minds is a ‘fund of funds’ with experienced people selecting quality managers, with a philanthropic angle. I also thought buying Magellan’s closed-end LIC, ASX:MGF, at a discount to NTA around 20%, was taking advantage of the market loss of appetite for the brand despite the quality underlying companies.

My new satellites took a hard landing when returning to earth over 2022. Yes, I went into this with my eyes open but it was disappointing that the funds did not bank more of their successes in 2020 and 2021. They are all global managers exposed to tech and investors should know what to expect of them. HM1 added fuel to the fire in late 2021 by updating its managers to include up-and-coming tech and growth managers, which were hit in 2022. Hyperion maintains great confidence in Tesla, down 65% in the last year, and 35% of the main portfolio is in three stocks: Tesla, Microsoft and Amazon. All great companies, but the chart shows Hyperion has given back nearly all the outperformance it took eight years to achieve since 2014. Ironically, perhaps the lesson is not to invest with managers after a long and successful run, and wait until they have given some back.

Hyperion Asset Management Global Growth performance since inception

My ‘index’ Australian equity positions were steady. While intuitively, I believe it should be possible to identify active managers who can deliver over time, it’s a long way back since the start of 2022 for some of these growth positions. Fortunately, the build of these active allocations had only started when tech problems hit.

I also held some long-term bond positions, such as in listed bonds, Australian Unity’s ASX:AYUPA paying 5% pa, ECP Fund’s ASX:ECPGA at 5.5% pa and Mercantile’s ASX:MVTHA at 4.8% pa. At the beginning of 2022, selling these would have reduced cash flow from over 5% to around zero, and (like everyone else including the Reserve Bank Governor), I did not expect rates to rise quickly. I decided to take the ongoing income which was likely to be better than cash, notwithstanding the greater (but I judged acceptable for the reward) credit risk.

These three listed securities are now ‘trading’ at about $88, no bid and $94. Not the end of the world but large capital losses on the defensive part of my portfolio were not part of the plan. Liquidity in these small, corporate bond issues is poor despite public listing. Spreads were wide and I sat on the offer for many weeks to reduce these bond positions at a decent price.

Listed property is delivering good income but with varying capital losses depending on the sector exposure. I thought staying away from offices and discretionary retail would protect the portfolio, but the downside on a fund like Charter Hall’s ASX:CLW has surprised. I expected its focus on industrial property, its long leases (average 12 years) to top-quality names (99% blue-chip), 6.8% distribution yield with half of the leases on the 549 properties linked to CPI (and therefore rising rapidly), plus low gearing (29.9% and most leases ‘triple-net’) were compelling. The market may be doubting the NTA at June 2022 of $6.26 because the share price is languishing at about $4.60, and it's the same with many property trusts. Rising rates weigh on cap values and the market is worried about independent valuations. Our average entry price is $4.80.

Source: Morningstar

The Lucky

US author Joe Wiggins focusses on the role of luck in investing, especially 'outcomes bias' where we judge the quality of the investment process by the result:

"From the unique life experience of a star fund manager to the early morning ice bath routine of a successful entrepreneur, we cannot help drawing a causal link between an individual’s success and their past actions. Yet so often the outcomes we see are nothing more than a mix of luck and survivorship bias, this is particularly true in the field of fund management."

Every diversified portfolio includes strokes of luck. In my desire for floating rate exposure, I am overweight bank hybrids, and if that sector struggles, my portfolio will take a mark-to-market hit. Then if a bank such as CBA or Macquarie fails to meet its obligations, or is forced to convert its hybrids to equity, I’ll end up with a large bank share position. Sometimes an investment looks good … until it doesn’t.

A big piece of luck came at the end of 2021 when Deutsche Bank advised Chi-X, the alternative exchange competitor to the ASX, that it was discontinuing its Transferable Custody Receipts (TraCRs) business in February 2022. I liked this product because it allowed investments in wonderful US companies such as Apple, Microsoft, Tesla, Berkshire Hathaway, Amazon and Alphabet (Google) on the Australian market with currency covered, including conversion of dividends. I felt these great companies deserved a place in most portfolios, and having built a TraCR position over 2020 and 2021, I planned to hold them for the long term. Chi-X gave various choices to holders, but I avoided the complications by selling at the end of 2021. It was an administration decision, not motivated by investment outcomes, but I missed most of the losses in these companies over 2022. I gave some back in smaller positions in growth fund managers described above.

What about the future?

My SMSF portfolio probably will not suit you. It is designed for my personality, family, age, goals, risk appetite, experience and outlook. No doubt my overweight in floating rate notes and underweight equities will seem wrong to some readers.

Investors who reduce equity exposure are faced with another timing decision on when to return to the market. For anyone who can hold a portfolio for the long term and not worry about capital fluctuations, the best outcome is likely to come from an equity-heavy portfolio throwing off rising dividends from quality companies, with steady capital growth.

Our SMSF is generating plenty of cash, and since it is in a mix of pension and accumulation mode, tax rates are low (yes, I’m one of those bastards who has contributed heavily to super for 30 years and now benefits from the attractive tax concessions). Hybrids and bonds are also regularly repaid and reinvestment of cash is a challenge. I have started directing some of this to equities, despite no great confidence we have seen the bottom. I feel the market is too confident about small falls in inflation and the expectation of central banks ‘pausing’, and the Fed will want to show that its work controlling inflation is still underway, even at a cost to economic growth. This is moving more into the realm of market timing rather than risk management, and no doubt luck will play a part.  


Graham Hand is Editor-at-Large for Firstlinks. This article is general information and does not consider the circumstances of any other investor, and is not a recommendation for any of the investments. The securities mentioned are listed securities given the ease of access for all readers, but 'wholesale' investors have many other opportunities, especially in bonds.


Pete L
January 27, 2023

Graham, not only are your articles informative over a wide variety of topics, but they also elicit intelligent and informed comments which only add to the readers knowledge base. I too looked at HYGG, the percentage they had in TSLA and steered clear; however in Nov 22 I did invest in a variety of managed funds (with good long term results) with 50% of the proceeds of a property sale and suffered much the same outcome. The other 50% I invested directly in the market and whilst down a small amount, have received dividends roughly equating to the loss. We are lucky that we are the recipients of State and Federal Government pensions and have other rental property as income. Your point is well made, just as one’s personal finances require the “right” investment mix, so does one’s SMSF.

January 23, 2023

Thank you Graham for sharing your portfolio experiences with us. Loved the story of your ‘4G’ friend who collects his dividends and is content that he has enough to live on. It can be bewildering, having followed many ‘good’ investment recommendations, and spending the time to do the research, to then find yourself with paper loses after a year like the last one. Sometimes it feels like the investment professions live in another universe, where their personal portfolios don’t get materially effected in these downturns, because somehow through their networks, they see these downdrafts coming, and find safe ports to avoid the impending storms. So it was refreshing to hear the even pro’s like you, to some degree, suffered some setbacks in parts of your portfolio - like the rest us.

Michael Walmsley
January 22, 2023

Really appreciate the article Graham
You have done a few of these over the years
I look forward and encourage you to continue with them

January 22, 2023

Well I'd like to think that most people can distinguish the difference between the two without having to say aged pension vs Superannuation pension.

Then, I have to take into consideration a person is smart, people are dumb and irrational for the most part.

January 20, 2023

I wonder if the complainers were simply overweight technology, & not nimble enough.

Bastard no. 2
January 20, 2023

Given that you admit to belonging to the class of bastards as you put it, I think we can assume that you only need to live on the income of your SMSF and not touch the capital. Therefore all the above seems a little hyperactive( and risky) for minimal (potential)gain.
Older Bastards should consider putting all their SMSF in indexed low cost ETFs that are largely equity heavy, diversified and requires no attention. Very hard to beat eg. VDHG
This should avoid help you sleep, reduce the risk of failing judgment and keep your costs down. Unless of course you enjoy the adrenaline and don't mind paying the price.

Just one bastard to another.

January 22, 2023

I was lucky to work in SMSF space from 1988 and when I started my own tax practice naturally attracted a lot SMSF Trustees to my practice.

I knew very little about stocks (nor had the time to learn), hence I just copied and pasted what my successful clients were doing - which was buying and renting their offices and factories to their business. Rent was guaranteed as the business was successful.

After 35 years of working in SMSF space (with a 8 figure SMSF) I have learnt some very important points which I want to share:

1) You should contribute maximum concessional before paying your home loan - after refinancing 7 times (every 3 years) - my equity is the same as what it was was when I purchased it - I have not paid a cent in interest or principal back to the bank in 30 years - lived for free on the growth of PPOR - basically capitalised interest every three years

2) Buy assets only in SMSF - there are laws in place for withdrawals in case of emergencies - as tax on income is at a concessional rate

3) Lend to your SMSF to buy income assets and payoff the loan with 85% of concessional contributions

4) Buy only high income producing assets with lowest risk of capital loss - this basically deletes ASX and residential property - only commercial property. This I learnt from a Greek client - to buy in an ethnic area like Cabramatta / Harris Park / Marrickville NSW - where there is population growth due to migration

5) After a few years - once the loans are paid out - rental income will generate 30% deposit for the next property and then you lend again by refinancing your own home

6) if your office or factory has to be sold to buy a bigger or smaller premises - you will pay only 10% tax on CGT - I moved 4 times over 28 years and each sale generated large profits

7 ) SMSF compulsory preservation rules allow the fund to earn income on income - outside SMSF you may upgrade your home or end up buying toys with profits

8) Most larger SMSF balances will only be able to spend the fruit - you must plan what should happen to the tree

9) One idea to solve problem in (8) is to contribute for kids with the fruit you are getting which you cannot finish - with 6 members bring in Son in law and grand kids - so that one day your tree becomes their tree

10) Hope that your grand kids will do the same for their grand kids - your assets moves from one generation to next without any Govt. Age pensioner getting a pension from your sacrifices

January 19, 2023

To characterise the 2 year return for the S+P 500 as “respectable” is debatable.
A 28.7% rise followed by an 18.1% fall results in a 5% increase over the 2 years, or 2.5% pa.
Not particularly respectable in my book.

SMSF Trustee
January 20, 2023

OK, I'll join the debate and take Graham's side.
Equities are a long term investment expected to be highly volatile. For a 2 year period that included a fall of 19% to be positive over the 2 years is an outcome that's well within realistic expectations for a short term outcome within a long term framework. That is a respectable outcome in my book.
In the interests of debate, why do you think it isn't?

January 22, 2023

Long term equity investment provides a modest outcome, because the return includes the cyclic volatility. Investors should raise their expectations and act to achieve them by trading equities more frequently to avoid the out of favour sectors from time to time. An SMSF, being an insignificant market participant, can be quite nimble where the large funds can’t.
An SMSF comprising 50% equities, 25% corporate bonds, 15% non-bank property finance and 10% cash can target a 15% return and achieve a minimum return of 10% in any one year.
If this is your expectation, a 2.5% return over 2 years would not be considered respectable.

Warwick Norman
January 19, 2023

Graham - I don't agree with your last self depreciating paragraph. The 30 years of contributing to your super was actually denying yourself many luxury pursuits and "toys." SMSF members who receive no pensions or extra concessions, inadvertently pay $50,000 tax each year. That is the close approx. cost of a full aged pension for a couple plus concessions they receive. I have a strong feeling the education of many grandchildren, and contributions to many worthwhile causes will benefit by the accumulated savings in SMSF's by many Australian's.

January 22, 2023

Some people put too much focus on getting a pension over being independently wealthy and not needing it. I've said for a long time there are basically 3 types of people, poor people who will get the pension anyway, rich people who don't need it and then there are those at the borderline level of getting or not getting the pension. They need to work out their finances to get the best benefit for themselves. It also needs to understood that getting the pension comes with conditions, how long you can be out of the country, how much you can take out and spend and possibly having to live a more frugal lifestyle than you otherwise would have if you structured finances differently.. I have a very large Superannuation Balance but still rent, I could go out and withdraw a huge amount from my Superannuation when I hit preservation age and buy an expensive home in Kew or Toorak so I meet the asset and income test by owning my non assessed PPoR and have just enough in Superannuation to get the pension but that would come with a huge reduction in lifestyle that the income from my Superannuation will provide if I didn't do that. Sometimes structuring financial affairs just to get a pension are not worth it.

Graham Hand
January 22, 2023

Let's distinguish between the pensions. There is a social security 'pension' (subject to an age, income and assets test) and there is drawing a 'pension' from a super fund (subject to qualifying to convert accumulation to pension). It's a pity they have the same name because wealthy people with large SMSFs still draw a 'pension', but it's their own money.


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