Frontier Advisors has published the report, saying its findings have implications for APRA’s assessment of funds, with the ranking of funds as either over or underperforming shifting significantly since the first round of the heatmap was published in December.
In its heatmaps, APRA has colour-coded the performance of funds, with underperforming receiving yellow and worse performers painted in red.
The regulator had largely based its heatmaps on a strong, positive correlation between funds’ growth/defensive ratios and their returns, as showed by the three-year performance to 30 June 2019 of each MySuper fund.
However, when Frontier reviewed the three-year performance to 31 March 2020, the risk/return correlation dissipated and funds were scattered around the median. Several outperformers had now lost their preferred status and found themselves in yellow and red territory.
Frontier has found that almost one in five funds changed their status as an under or overperformer over the period – which it said highlights the difficulty in assessing the merits of a fund based on a single measure of risk.
“Despite only nine months relapsing between the two calculation dates, funds will have moved from outperforming to underperforming and vice versa,” the report stated.
Two-fifths (40 per cent) of funds outperformed in up markets and underperformed in down markets, which could be achieved by taking more risk than the average fund.
A third (33 per cent) underperformed in up markets and outperformed in down markets, by taking less risk.
As measured by SuperRating’s SR50, the top 10 performing super funds earned more than 16.5 per cent in 2019 compared to the median fund’s 14.7 per cent.
But Frontier reported for the 2020 March quarter, the top 10 gave -10.4 per cent, compared to the -10.5 per cent median.
The performance was no better than an average fund, “highlighting the danger of choosing a fund based on [short-term] performance,” Frontier said.
The three and five years to June 2019 were “normal” markets, Frontier’s report stated, where risk was rewarded with higher returns. Funds with a higher growth ratio performed better than peers with a lower ratio.
David Carruthers, principal consultant at Frontier commented attempting to assess performance without a deep understanding of each fund’s approach to risk can lead to the wrong conclusions.
“Being higher or lower risk is neither a sign of a good or bad fund,” Mr Carruthers said.
“It may well be an explicit decision taken to suit the demographic profile of the fund’s membership. Of course, there will often be consistent underperformers but it is difficult and potentially dangerous to assess funds on single perspectives of risk.
“Superannuation fund members who have been monitoring the heatmap rankings of their fund, especially following the recent volatility, might well be confused to see such a quick change in APRA’s assessment.”
The Frontier analysis stated standard deviation was a considerably better predictor of a fund’s outcome in the March quarter than the fund’s growth ratio.
Further, the research has shown that during 10 years of analysis, there are a small number of funds that outperformed in both up and down markets, but no funds that have consistently underperformed in both market conditions.
