Can self‐managed superannuation fund trustees earn the equity risk premium?

Abstract

Purpose

The purpose of this paper is to determine whether self‐managed superannuation fund (SMSF) trustees earn: the equity risk premium or any premium to the riskless rate of interest.

Design/methodology/approach

Using a sample of 100 SMSFs, the average annual returns since inception of the funds in the sample are compared with: the average annual equity risk premium since that time and the average yield of Commonwealth Government Securities since that time.

Findings

The investigation reveals: the SMSFs in the sample do not earn the equity risk premium and the SMSFs in the sample did not earn a premium to riskless rate of interest. This leads to the conclusion that the SMSFs have borne risk without commensurate reward. Research limitations/implications – The trustees' rationale for making particular investment decisions and the consistency of the portfolio structures with the risk profiles of the trustees are two areas that may be fruitfully explored in future research.

Practical implications

For SMSF trustees, a simple portfolio that divides assets between (unmanaged) index funds and risk‐free securities on the basis of trustees' risk aversion may generate better results than the existing portfolios. For policy makers, the relatively poor performance of SMSFs implies that the superannuation system as currently structured may not be generating returns that will maximize retirement incomes.

Originality/value

The paper provides the first comparison of SMSF returns with the equity risk premium and the riskless rate of interest measured at appropriate horizons.

Citation

Phillips, P.J., Baczynski, M. and Teale, J. (2009), "Can self‐managed superannuation fund trustees earn the equity risk premium?", Accounting Research Journal, Vol. 22 No. 1, pp. 27-45. https://doi.org/10.1108/10309610910975315