New analysis raises more questions about APRA methodology

Mike Taylor

Managing Editor/Publisher, Financial Newswire

5 September 2022

At the same time as smaller superannuation funds have been placed under pressure to merge by the Australian Prudential Regulation Authority (APRA), new analysis from Frontier Investment Consulting has revealed how well many have performed relative to larger funds.

What is more, Frontier’s analysis shows that some of the smaller funds nominated as ‘poor’ performers in 2021 have turned their fortunes around and are among the industry’s best performers this year.

Frontier said its analysis explored a number of elements of the industry’s best performers across the 2021/22 year and has found asset allocation was a more influential factor than size and scale when it comes to investment performance.

It said the analysis was of relevance for the current discussions around both the MySuper performance test, and Minister of Financial Services, Stephen Jones’ recent comments on the creation of larger funds, Frontier’s analysis demonstrates that, even over the longer term, the correlation between performance and  size is not conclusive.

Using SuperRatings SR50 Balanced universe to determine the ‘top ten’ funds, Frontier highlights  seven of last year’s top performers had less than $30 billion in assets, with five less than $15 billion. Other ‘smaller’ funds not in the SuperRatings survey, such as First Super and MIESF, were among just a handful of funds to post positive returns in a year when the industry median was -3.0%.

“In a year of two halves, with positive performance in the first half and negative in the second,  Frontier’s analysis shows funds needed to do well in both periods to appear at the top of the performance league table,” it said.

“Funds with a larger allocation to unlisted assets typically performed best. The impact of periodic  valuations of unlisted assets has helped portfolios hold up during the ‘risk-off’ sentiment of the last twelve months. This was a much stronger determinant of outcomes than fund size.”

“The correlation between size and poor performance does hold up to an extent at the bottom end, with the poorest performers all having less than $5 billion in funds under management. This finding suggests while small size alone can be a flag for underperformance, it is not a definitive predictor.”

“First Super and MIESF are examples of funds defying the odds.

“Over a ten-year horizon however, Frontier found a stronger correlation between size and performance. Frontier’s report notes that while it is clear ten years is a more meaningful time period to review fund performance, what is not clear is “whether larger funds have better performance because they are large, or whether they are large because they have better performance”.

“Just as not all small funds underperform, not all large funds are at the top of the performance charts.”

“Frontier Senior Consultant Daniel Leslie, believes consistent performance is a more useful metric for both members and regulators to consider in assessing performance.

“Consistent performance leads to optimal long-term performance. Of course, there will be individual below-par years along the way but of the ‘top ten over ten’, only AustralianSuper and HESTA have outperformed the median fund in every financial year. Most of the top ten funds have had periods of underperformance in the last decade, and Hostplus as the best performer over ten years, has even had periods of bottom quartile returns,” said Leslie.

Co-author of Frontier’s report, Principal Consultant David Carruthers, drew the connection between these outcome and APRA’s performance test.

“A number of last year’s ‘failing funds’ produced some of the best returns this year. It’s a reflection that some of those funds may not have been bad funds after all. The members that stayed with those funds have done very well this last year”, said Carruthers.