Few issues are more controversial in super than how super fund investment performance is reported and discussions about which factors drive fund performance.
Consider the position of the Australian Prudential Regulation Authority (APRA) regarding fund performance. It finds itself at the epicentre of a debate that still has considerable distance to travel before some form of industry consensus is reached and even further before clarity from an investor’s perspective can be achieved.
Long-serving deputy chairman of APRA Ross Jones has publically described one of the regulator’s functions as being a “disinterested reporter” of statistical information that is “in most cases non-contentious”.
But then adds Jones somewhat poignantly: “The main exception to the ‘non-contentious’ point … arises in our superannuation publications, most notably those sections of the publications which reveal relative return differences between funds entrusted to not-for-profit and retail trustees.”
There are two central causes behind the latest burst of contention around APRA regarding super fund performance. First, there is its imminent reporting of individual fund or trustee performance. And then there is the release last week of a “working paper” covering why some types of funds outperform others in the view of two APRA researchers.
Within the next six weeks or so, APRA will publish for the first time a performance table showing the return on assets achieved by individual super funds or trustees. To date, it has only reported the return on assets of fund sectors (divided into retail, industry, public-sector and corporate funds with $50 million-plus in assets).
APRA’s first fund-level performance figures will cover the five years to June 30, 2008.
The regulator’s most recent Insight publication includes its overview of super fund performance during the 2007 and 2008 calendar years, and an explanation of why the new performance league table is being produced. (Seehttp://www.apra.gov.au/Insight/upload/Insight_Issue_2_2009_all.pdf)
In short, APRA believes that its revamped approach will enable fund members to compare fund performance in a more informed way.
Specialist superannuation researchers SuperRatings, Chant West and SelectingSuper already provide performance figures at fund level with the after-tax, after-fee returns divided into the most-common portfolio types (typically high-growth growth, balanced or default and conservative). And often the most accessible information gives the returns of the top-10 performers over various periods.
If the debate over investment performance wasn’t hot enough, two APRA researchers Wilson Sy and Kevin Liu last week presented a research working paper Investment performance ranking of superannuation firms, which truly stoked the fire along. The paper carries the clear rider that the views and analysis are those of the authors and do not necessarily reflect those of APRA. (See http://www.apra.gov.au/Research/upload/SA_WP_IPRSF_062009_ex.pdf)
The paper is an interesting, technical review of various methodologies for assessing fund performance and risk. It looks at the issue clearly from the perspective of a member of an institutional-style super fund, however for trustees of their own self-managed super fund it provides an interesting summary of a broad range of industry research.
The challenge the researchers have set themselves is to come up with a “new and more reliable way for individual investors to make investment selections for their retirement savings”.
No small undertaking and one that they believe requires quarterly asset allocation data of the total super fund. The key difference with this approach is that rather than rank the individual funds or portfolios they are looking to compare the performance of the management firm or its composite portfolios. So the focus is more on the effectiveness and governance of the organisation rather than an individual fund or portfolio.
In their working paper, Sy and Liu also raise a number of issues based on five years of annual data (from 2002 to 2006) for 115 super funds.
- The average firm under-performed its net benchmark by 0.9% and the net under performance of the average firm appears more pronounced in down markets.
- Higher operational costs of super funds “correlated significantly” with lower investment performance. In other words costs matter and in investing the more you pay as an investor the less you get once all fees and taxes are deducted.
- Super funds can “reduce their overall operation costs by negotiating lower fees with service providers … Or, the pension firms [super funds] can avoid paying high active management fees by using passive management for a larger proportion of its assets”.
- Asset allocation is a major driver of investment performance
- High ranking performance does not appear to persist over the long term
The researchers are proposing the development of a new measure – risk adjusted value added (RAVA) – as a result of their analysis with the aim of helping investors make better informed fund selection decisions.
To achieve that APRA will need to collect quarterly asset allocation so it will be interesting to see if that is indeed a future development for APRA’s performance table that was championed by the former Minister for Superannuation, Nick Sherry.
The role of regulator is an often thankless task so credit is due for confronting and contributing to the debate – even if this does not prove to be the final solution.
If investors end up with simple, transparent measure that help make better choices about which super fund is right for them the entire industry will be a winner.