APRA tables are no help to consumers
“APRA’s release, on 20 August 2009, of superannuation whole-of-fund performance data was a sad day for the Australian superannuation industry”, says Chant West principal, Warren Chant. “At first sight, the data may appear to be harmless, but that is not the case. Where the harm lies is in any suggestion that these league tables are at all useful in helping consumers to compare and choose funds. They’re not and, rather than help consumers, they have the potential to confuse and mislead them.”
APRA has provided performance tables for 200 funds covering the five financial years from 2004 to 2008. The great majority of those 200 funds offer more than one investment option – typically between five and ten but in some cases (retail wrap products) hundreds of options. A whole-of-fund return is the weighted average return of all the investment options offered by the fund.
Chant says: “No-one can actually invest in such an ‘investment option’, because it doesn’t exist. Even the funds’ trustees don’t actively monitor their whole-of-fund performance, because it has no risk and return parameters and no performance benchmarks – it’s irrelevant.”
Instead, trustees and members monitor and measure the performance of specific investment options. These options have clearly defined investment objectives which cover expected returns and risks – as the law requires – and their performance can be tracked against those objectives.
Most performance is explained by asset allocation
Chant says most performance is a function of the asset allocation, or investment mix, of the investment option. “Take for example Fund A, where almost all members are invested in the fund’s 70/30 option (70% shares & property, 30% cash & bonds), and Fund B, where 50% of members invest in a 70/30 option and 50% in a 30/70 option. At the whole-of-fund level, Fund B is a 50/50 fund.
“Over the long term, at the whole-of-fund level, we would expect Fund A to outperform Fund B because it has a higher allocation to growth assets. But we would also expect it to have a higher level of risk. Table 1
illustrates this point. It shows the expected long term risk and return characteristics (gross of fees and tax) of a typical range of diversified options.
Note: Broadly, growth assets are shares and property and defensive assets are cash and bonds
|Table 1: Long Term (10 years +) risk and return expectations for diversified options |
|Option ||Growth / defensive assets (%) ||Expected return (%pa) ||Expected standard deviation (%) ||Probability of a negative return in any given year |
|Conservative || 30/70 ||6.0 || 4.0 || 1 in 12 |
|Balanced ||50/50 ||7.0 ||6.0 ||1 in 7 |
|Growth ||70/30 ||8.0 || 8.0 ||1 in 6 |
|High Growth ||85/15 ||9.0 ||10.0 || 1 in 5 |
“Both the return and the risk are relevant. If, as we expect, Fund A does outperform over the long term, then in no sense can we conclude that it is ‘better’ than Fund B. Yet that is what someone looking at the APRA tables is likely to infer.
“The whole-of-fund information is irrelevant to the members of both funds. Those invested in a 70/30 option want to compare their performance with other 70/30 options, while those invested in a 30/70 option want to compare it with other 30/70 options.
“To put it on a more human level, a 25 year old in a growth option is not interested in the returns that a 65 year old retiree drawing a pension from a conservative option is getting, and vice versa. And neither of them is interested in the performance of the fund as a whole, nor is the trustee.
“Even if APRA had provided the returns of the funds’ default options, in which most members are actually invested, then to make sense of the data we would still need to know the level of risk inherent in each option. But APRA provides no information on risk, so consumers have no way of evaluating the information provided, even if they want to. And, of course, retail funds don’t have default options as investors must choose the options they wish to invest in.
Why did APRA release this data?
“APRA released this information primarily because it was asked to by Senator Sherry. Cynically, we might say that was because he wanted to show that industry funds have historically outperformed retail funds. We have no argument with this premise, but we do have an argument with using the APRA data to arrive at this conclusion.
“We have been producing figures for some time showing the difference in performance between industry funds and retail funds. But our research has been on an ‘apples with apples’ basis, comparing real investment options with broadly the same growth/defensive asset mix, and on that basis industry funds have clearly been the better performers, as Table 2
Note: Performance is shown net of investment fees and tax. It does not include administration fees, member fees or adviser commissions
|Table 2: Median performance in growth option category (61-80% growth assets) by industry segment to 31 July 2009 (%) |
|Segment ||3 Mths ||1 Yr ||3 Yrs (pa) ||5 Yrs (pa) ||7 Yrs (pa) |
|Industry Funds || 4.7 ||-8.4 || 0.2 || 5.7 || 6.5 |
|Master Trusts || 7.4 ||-8.5 || -1.8 || 4.2 || 5.2 |
|Difference ||-2.7 ||+0.1 || +2.0 ||+1.5 ||+1.3 |
“APRA has little information on investment options and it has said publicly that, because of its approval processes, collecting and publishing new data requires about a three year cycle from initiation to first publication. So, on that basis, if it started collecting that information now it might publish some meaningful results in 2012.”
APRA argues that certain sections of the SIS Act justify its decision to publish whole-of-fund returns. This is highly questionable among legal circles and, in particular, APRA’s reliance on Subsection 52 (2) (f) which states that superannuation trustees must ‘formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the entity‘.
In Chant West’s experience, trustees may establish broad principles regarding a fund’s investment policies but they only determine a specific investment strategy at the investment option level. They monitor and measure the performance of each investment option against its clearly defined investment objectives. They pay little regard, if any, to the performance of the fund as a whole as they do not set clearly defined investment objectives for it. Trustees have been doing this since the SIS Act was introduced 15 years ago and believe they are complying with the law.
APRA also argues that its data is authoritative as it is based on audited annual returns submitted by the funds’ trustees. These same trustees submit data to research houses each month based on well accepted market protocols. Trustees use the performance reports from research houses as an integral part of their monitoring of how their investment options are performing in absolute terms, against their benchmarks and their peers.
Producing monthly data may lack some accuracy for the sake of timeliness but, in our experience, the discrepancies are minimal and not material in terms of affecting comparisons, conclusions and decision-making. If research houses were to wait until they too had audited returns (ie annually, and usually 6 to 8 weeks after the end of the financial year) then the results would be so out of date as to be of little value.
How should returns be presented?
APRA’s returns are calculated after deducting all fees – investment, administration, member and adviser trail commission – and tax. A key issue is whether adviser commission should be deducted, because there is considerable debate as to whether members actually receive advice for the commission charged (which is only by retail funds). Anecdotally, many members don’t but many do.
APRA’s fund profiles show that retail funds attract a significant amount of personal contributions – about 50% of their total contributions inflow compared with 15% for all other market segments. This suggests that advisers are doing a good job in advising clients about the size of the nest egg they need to retire on, and the contributions they need to make to get there. Where a member does receive advice, we believe adviser commission should not be deducted as a separate service has been received.
Chant West shows returns after investment fees and tax so as to focus purely on how well an investment option has performed. We do not deduct adviser commission because members may be receiving a service for this fee. We do not deduct administration fees because not-for-profit funds typically do not deduct this fee from their returns whereas retail funds do. We believe our approach gives a fairer basis on which to compare investment performance. Other fees should be considered separately and can be assessed in their own right. They can easily be deducted to obtain the net benefit to members.
What should APRA do now?
“We believe that if APRA’s intention is to help consumers it should publish returns at the investment option level, not the whole-of-fund level,” Chant says. “But first, it should decide whether this is an appropriate role for a regulator, particularly when commercial research houses already provide this information and on a timely basis.
“Any published data needs to consider both return and risk. To simplify matters for consumers, we tend to explain risk in terms of the level of growth assets – the higher level of growth assets, the higher the level of risk. This is not a perfect concept, but it is simple and relatively easy to understand.
“Consumers would benefit from more consistency in the terminology that the industry uses. To do that, we need to agree on matters such as how assets such as direct property, infrastructure and hedge funds are categorised (are they growth or defensive?), what we call the different risk profiles (eg conservative, balanced, growth and high growth) and the range of growth assets in each profile (eg 21 – 40%, 41 – 60%, 61 – 80% and 81 – 100%). Funds themselves will not reach agreement on these issues, nor will the industry bodies that represent them. Here is a clear role for APRA, and one it should be working on now if it wants to make a real contribution to the industry.”
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