Some ‘failed’ funds delivered higher returns

Some of the funds which were deemed to have ‘failed’ in the Australian Prudential Regulation Authority’s (APRA’s) performance test actually delivered higher returns than those deemed to have passed, according to Frontier Investment Advisers.

Frontier, closely associated with the industry funds movement, has released an analysis suggesting that the APRA approach is not reflective of the whole story with respect to superannuation fund performance.

It said that while it supports the objectives of the performance test, it worries that “simple performance comparisons can tell an incomplete story, and in some cases a confusing story for members trying to understand whether their fund is failing to deliver for them”.

“Frontier analysis of the test results highlights that a number of funds which have failed the test have actually delivered higher returns than others deemed to have made the grade. This is typically a function of the investment strategy of each fund accepting different levels of risk to achieve its stated aims,” Frontier said.

“Frontier believes the key to assessing acceptable performance is considering whether returns achieved reflect the level of risk taken and the stated objectives being sought.”

It said the nature and significance of the test risks encouraging funds to aim primarily at passing the test by seeking an easier investment path ahead of delivering the most appropriate long-term outcomes for their members.

“Frontier analysis shows that the level of returns delivered, or even the size of funds, are not necessarily indicators of a successful fund, based on APRA’s assessment. Further, the binary nature of a pass or fail means there are several funds passing ‘close to the line’, while others have missed out by very thin margins.”

Frontier Principal Consultant David Carruthers claimed the performance test only assesses a small part of outcomes for members.

“At a simple level, the test assesses how well a fund has implemented its investment strategy and not whether it is a good strategy for its members. While we accept many members will appreciate a simple pass and fail view, unfortunately the reality of assessing whether their fund has performed for them is far more nuanced,” he said.

“There are a range of factors funds need to consider, such as lifecycle design, active or passive beliefs, even ESG matters, all of which impact risk profile, that are really important in delivering an appropriate product for members. Then of course there are a range of other factors unrelated to investment performance, such as insurance and service delivery, for members to consider. Not incorporating a more complete set of variables could, and we would argue will, lead to confusion in some cases.”