SMSFs using direct share investing will weather market correction better than managed funds

SMSFs using direct shares in their portfolio will significantly outperform actively managed funds in the event of a market correction. This is the core reason SMS’s buy shares directly, in line with their preference for “investment control” which is cited by the majority of SMSF’s as the main reason they set up their SMSF.

“Despite the recent media hype from the traditional funds management industry, direct share investing is well known to out-perform actively managed funds in a market correction. That’s because actively managed funds are forced by their mandates to sell shares when the market falls, locking in losses which can take many years to recover,” said LPAC Online Founder Dr Tony Rumble.

“In contrast, when a market correction isn’t based on fundamentals, direct share investors can choose not to sell their shares and wait for the market to recover – thereby avoiding locking in losses that the funds management industry can’t avoid,” said Dr Rumble

“The peak regulator APRA stated clearly in its 2009 research on the performance of actively managed funds, that active funds tend to under-perform their benchmark and that this under-performance was more pronounced in down markets,” noted Dr Rumble.

“The traditional funds management industry and its service providers hide from this APRA research, which explicitly stated that APRA has doubts about the value of the active approach to risk management,” Rumble said.

“In contrast, direct share investors can and should ignore market corrections and simply hold onto their shares, unless there is a fundamental impairment to the income generating capacity of the underlying company,” Dr Rumble said.

“That’s why Warren Buffet doesn’t get fussed about share prices and short term market movements, instead focussing on the fundamental value of the stock – as he was taught to do so by Ben Graham,” said Dr Rumble.

“Actively managed funds sell stocks in down turns based on sentiment, as price is a major factor in trying to beat the index, which is their mandate” said Dr Rumble.

“That practice is known as being “short gamma” and is a major cause of wealth destruction, because it ignores fundamentals,” Dr Rumble said.

“In fact the entire risk-profiling industry and its link with the traditional funds management industry should be closely scrutinized because of this problem,” said Dr Rumble.

“Recent claims by firms like FinaMetrica are simply not based on the evidence of this problem,” said Dr Rumble

“When SMSFs buy and hold a concentrated portfolio of quality stocks they enjoy access to growing dividend streams which they use to fund their retirement,” Dr Rumble said.

“Investors who bought bank stocks 20 years ago are now earning more than 50% yield per annum based on their original purchase price, and this is a major source of funding for retirement,” said Dr Rumble.

“Our LPAC Program has accredited over 2000 financial planners in the last decade to give direct share advice to SMSF’s and the added investment control this brings is a much valued part of their client value proposition,” Dr Rumble said.

[The APRA paper is: Sy W and Liu K: Investment Performance Ranking of Superannuation Firms (APRA Working Paper, 23 June 2009)]