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Fund size ‘not a definitive predictor’ of performance, research shows

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Smaller super funds were among the best performers in the last financial year.

Analysis by Frontier Advisors has concluded that asset allocation was a more influential factor for the investment performance of super funds in 2020–21 than size and scale.

Namely, some of the best performing super funds across the last year were some of the industry’s smallest with APRA revealing last week that as many as seven of the top 10 performers had less than $30 billion in assets, while five had under $15 billion.

Additionally, smaller funds such as First Super and MIESF were among the few to end the year in the black compared to the median industry return of -3.0 per cent.

Strategies with a larger proportion of unlisted assets across infrastructure, property and private equity, typically performed better.

But, Frontier did concede that the correlation between size and poor performance does hold up at the bottom end of the ladder. Namely, the poorest performing funds had less than $5 billion in assets. As such, Frontier explained that while a fund’s size can be a flag for underperformance, it is not a definitive predictor.

A stronger correlation between size and performance was identified over a 10-year timeframe. However, the firm noted that “it is unclear whether the larger funds have better performance because they are large, or whether they are large because they have better performance”.

According to Frontier’s senior consultant, Daniel Leslie, consistent performance is a more useful metric for both members and regulators to consider when assessing fund 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 10 over 10’, only AustralianSuper and HESTA have outperformed the median fund in every financial year,” he said.

“Most of the top 10 funds have had periods of underperformance in the last decade, and Hostplus as the best performer over 10 years, has even had periods of bottom quartile returns.”

The findings follow the release of APRA’s second performance test which saw a total of five funds fail to meet the objective benchmark.

Four funds, including Australian Catholic Superannuation and Retirement Fund's LifetimeOne, EISS Super's MySuper (Balanced), BT Super's MySuper and AMG Super, failed for a second time.

“A number of last year’s ‘failing funds’ produced some of the best returns this year,” commented Frontier principal consultant, David Carruthers.

“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.”

As such, Frontier has called for a more robust assessment across a wider range of factors in order to determine whether funds are of appropriate quality and providing good value to members.

The firm is of the opinion that a more thorough analysis is required, one that includes a study of investment performance across multiple time periods, and considers the level and nature of investment risk alongside fees and costs.

“The focus needs to be on improved outcomes for members over the long term,” Mr Carruthers added.

KPMG previously noted that while the annual performance test has been a driver of industry consolidation, this now represents a challenge for small-to-medium funds needing a merger partner because a great many funds may not be looking to be involved in additional mergers.