My name is Bruce Frost and I am a director of FCCAudit Pty … we are specialist auditors of Self-Managed Superannuation Funds.

​

I would like to introduce to you a report we produce at FCCAUDIT as part of every audit we undertake, it’s called an Investment Return Report (or IRR). IRR’s are able to give trustees and advisors of SMSFs a valuable tool for investment decision making.

 

It enables trustees and their advisors to answer a very important question:

“How well are my SMSF investments performing”.

 

In order to adequately provide for their retirement, every member would hope that their superannuation investments are performing adequately to support their retirement income needs. An important guide to how SMSF investments are performing should be found in the annual financial statements.

 

However many trustees and members are Confused by their SMSF financial statements. That’s because these reports are prepared to fulfill statutory obligations and are not very helpful in assessing the investment performance of the investments in the superannuation fund.

 

The reasons SMSF financial statements are confusing include;

a. Contributions from members are usually included as fund income – but they are not income from investments - they are additional capital for investment in the fund -  they are not a return on investment, therefore not really income

b. on the expenditure side, expenses often include pensions and insurance – which are not investment expenses - pensions are a return of capital and life insurance is a member benefit.

 

So it is little wonder that the financial statements do not report the financial performance of a SMSF investments.

Another reason the financial statements are not totally helpful is that there is no appropriate investment performance benchmark reported in the reports, only a comparison to prior years actual returns.

Comparing only to the prior period does not account for changes in funds invested, nor changes in market conditions.

 

However our Investment Return Report helps trustees because..

 

It is a Simple report which is included in our Auditor’s Letter to Trustees, as a standard part of our audit, so there is no extra cost in providing the report…

 

But

It is easy to understand  because by showing only one percentage return - which is compared to a market-based benchmark return, Trustees are able to quickly see whether their investments are performing above, below or in line with general market conditions for the asset classes their investments are placed in.

 

We use the indicative investment return of the fund, when compared to industry benchmarks, to determine the likelihood of errors in the published financial statements of each fund. Where there is a significant difference between the actual performance and benchmarks, the reasons are investigated and assurance gained that the financial reports are accurate.

 

The indicative investment return is a calculation of the actual performance return on a fund’s investments for the year. But why is it only Indicative?  Because it is not a precise calculation particularly because the fund balance varies on a daily basis

 

The indicative actual investment return is then compared to a composite benchmark return.

The calculation of the composite industry benchmark looks like this:

 

• The assets are allocated to popular asset classes, with allowance for borrowings and also unusual asset classes can be assessed if they are material.

• The investment benchmarks used are Accepted Industry Benchmarks. For shares for example, the ASX 200 accumulation index is used, which accounts for the general movement in the price of shares and for dividends received.

• Each fund’s actual asset allocation is weighted against the benchmark for each class of investments to determine a composite benchmark return.

• Then we can quantify the variation from benchmark in dollar terms not just percentage terms

 

We compare the fund’s investment expenses against industry benchmark. This gives a guide as to whether advisors fees are in line with current industry experiences

 

The final Report is concise and easy to follow. It is provided with comments by our audit team on any significant variations between actual and bench mark performances.

 

We believe the investment return report provides a valuable decision-making tool for trustees and their advisors

 

Thank you for reading this article and we look forward to discussing the benefits of Investment Return Reports with you further.