APRA signals more super fund exits

The Australian Prudential Regulation Authority (APRA) has signalled that industry funds may be amongst the under-performers which are ultimately weeded out of the industry in circumstances where there are some retail funds which outperform industry funds and vice versa.

At the same time as confirming how APRA utilised performance and other related data to put pressure on a number of funds to exit the industry, the regulator’s chairman, Wayne Byres downplayed Productivity Commission (PC) suggestions that the industry funds sector had consistently outperformed retail describing it as an average outcome that was “not particularly helpful”.

He said that there were a lot of generalisations made from high level data and that when APRA dug down on that data the picture was much more complex and much more nuanced.

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After stating in his opening address to Senate estimates that 13 funds had opted to exit the industry, Byres said the regulator had used that data to identify the cohort of funds who seemed to be underperforming across a number of different measures.

“We've used that [data] to put pressure on those funds to lift their game in some shape or form,” he said. “As I said, in about half of those cases, putting that data in that compelling way in front of trustees has meant that the trustees have decided that the best thing they can do for their members is hand them over to someone else and exit the industry.”

“So, I don't think there is any lack of curiosity about what's in the data,” Byres said.

Byres said that it was APRA’s intention to intensify its work around its member outcomes project and agreed this would include an assessment of industry, public sector, corporate and retail funds.

“That's essentially what we're doing at present,” he said. “In the work we did on member outcomes, we picked a bottom cohort, but we're essentially using all APRA funds, running them through on a range of metrics, ranking them and finding the ones that ranked performing across a number of dimensions. They were, if you like, our first hit list. Having worked through those, now we've got to come back and look at the next lot.”

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This might make sense if the regulators looked purely at the overall returns for members. Where it doesn't make sense is when they get fixated on a metric like fund size for purely dogmatic reasons. There is no logic to their argument around fund size as can clearly be seen from the returns many smaller funds have been able to deliver over recent years. The Melbourne Grand Prix is only a few weeks away and those formulae one cars are pretty small and have small engines, but they go a heck of a lot faster than the V8's or lumbering semi trailers.

Host Plus has 7.43% return over the last 10 years. None of my clients in the growth stage have had 10 year returns worse than that. Will Host Plus be removed as it is underperforming?

And will the Barefoot HostPlus spruiker ever be held to account for the product recommendations he makes without any knowledge of his audience's personal circumstances?

In fact Host Plus's best (Pre mixed) investment return over 10 years is only 9.25% pa. Thats pretty poor and they are the best performing Industry Fund. Now wonder their fees are low. Do they get school kids studying economics to invest for them as part of an assignment?

How can they get away with statements like "we are the best performing fund"? Are they the Donald Trump of Super Funds?

The average fund ( Morningstar) return for a Growth fund over 10 years to Jan19 is 7.15% per annum, by any stretch 9.25% is a good return or certainly above average. Return comparisons are a foolish notion, much depends on cash flow timing into/out of funds, and no 2 funds are ever alike in this regard.

Yet the index is 8.95%. Looks like many funds will be chopped for under performing an index at the expense of members.

I can't see how any index fund will match the index. Realistically the index fund should match the index, but then the admin fees and MER's will lower the reported performance significantly.

Perhaps APRA/ASIC should be using high fund returns as an indicator that the risk profile of the fund is not matching investor understanding??? eg should an investor be able to trust they are in a "Balanced" fund if that is the name of the fund. Does APRA/ASIC even care if investors are misunderstanding the investments?

It feels like APRA might be heading in the right direction here. As a no interest in super safety net approach for some members i'd be happy for APRA to go with their 10 best funds list if they are doing the research correctly and measuring on standard risk adjusted basis.
Also include a statement around the owner of the fund so clients can make a decision based on who they want to support. (This fund is owned / pays benefits to ABC Bank or XYZ Union)
Finally, all licensed advisers should be able to use any of those top 10 funds to provide simple strategic retirement planning advice. Client, you should reduce your current living costs to $x and put $y into your super or pay off debt and you should be able to retire at your planned age on your planned income.
ASIC / Money Smart could provide the tools and calculators / template for advisers to use and a copy of the advice is emailed directly to the client, the adviser, the fund, the licensee and ASIC.
And to be in the top 10 list the fund should allow 1 off fee deductions for advice.

There are element of genius in your suggestions.

APRA is being true-to-form here. They have never suggested Industry funds outperform, as APRA use a more nuanced view than ASIC's limited view of performance data.

There needs to be a streamlined process for advisers to provide information to current and prospective fund members. Your hitlist of "APRA top X" funds is a brilliant idea, if considered in this context. The funds could have standard disclosure data. There could be a standardised comparison chart/data-table. It would allow advisers to provide cost-effective advice that is not silo'd into a particular vertical integration model.
I like a little lateral thinking every now and then.

Perhaps turning any adviser into an intra fund adviser for the APRA list funds. APRA can select the funds and this will keep trustees working really hard to have the best offering for the members as if they drop out of the list, they will drop FUM.

And i'd be happy for a prescribed Flat $ fee for this advice so long as it's value for both client and adviser.

Add to that list Clubplus, Hostplus and GESB. All funds where the words "cheque" and "fax machine" and "post" and "6 monthly trustee meeting" are common.

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