In this paper we examine the diversification and performance of a small preliminary sample of Australian self managed superannuation (retirement) funds (SMSFs). Using the single index model and traditional (risk-adjusted) performance measures within the context set by modern portfolio theory we find that the SMSFs in our sample exhibit considerable under-diversification. In addition, we find that the SMSFs do not appear to be benefiting from even naïve diversification and, unsurprisingly, perform poorly on a risk-adjusted basis vis-à-vis the unmanaged S&P/ASX300 index. This empirical investigation contributes to economists' understanding of the microeconomic structure of this increasingly important component of Australia's retirement income stream. indeed, the superannuation fund industry as a whole, is still in its infancy relative to the prudential supervision of authorised deposit taking institutions and insurance companies. As such, research into the nature of this new and burgeoning industry is required to assist with the development of sound policies. It is the purpose of this paper to contribute to the body of empirical knowledge that guides the policies of those whose task it is to ensure the prudent management of SMSFs.Whilst superannuation has generated a reasonable amount of research by economists and others, self managed superannuation is still very much frontier territory. It has only just begun to be explored and there remains much to discover, particularly at the micro level of individual SMSFs. This paper concentrates on contributing to our empirical knowledge of SMSFs by examining two particular aspects of SMSF microstructure: diversification and performance. Financial economic theory has long stressed the importance and benefits of portfolio diversification and much time has been spent investigating the attainment of appropriate levels of diversification. Using the single index model developed by Sharpe (1963) and the portfolio performance measures developed by Sharpe and Treynor, we examine the degree of diversification exhibited by the SMSFs in our sample and their risk-adjusted performance.The results of the investigation revealed that, treated as individual portfolios, the SMSFs analysed herein exhibit a considerable degree of under-diversification and poor risk-adjusted performance relative to the unmanaged benchmark S&P/ASX300 index. The volatility of the returns generated by these SMSFs is attributable to a very large degree to the volatility of the returns of specific assets within the portfolios, 2 especially particular shares in Australian companies, and only to a very small degree to the overall share market (or the macroeconomy). These funds, taken as individual portfolios, are vulnerable to adverse fluctuations in the fortunes of a relatively small number of companies or industrial sectors. Not surprisingly, the risk-adjusted performance of the SMSFs is relatively poor and could be improved, in most cases, by simply allocating funds between the risk free security and th...

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