APRA researchers suggest new approach

A paper published by two Australian Prudential Regulation Authority (APRA) researchers has suggested the implementation of a new methodology whereby the overall performance of funds would be rated rather than the performance of the funds’ various investments.

The research paper was delivered to a University of NSW colloquium by Wilson Sy and Kevin Liu, and suggests a new approach “where instead of comparing investment performance of individual funds or portfolios, we compare the investment performance of management firms or their composite portfolios”.

The two researchers argue that the main advantages of this new approach are “firstly, we can apply a consistent methodology to calculate returns using audited accounting data for all firms and secondly, we avoid selection bias by making a weighted-average assessment of all portfolios managed by the firm”. “Thirdly, the investment performance of a managed firm is a quantitative measure of the effectiveness of its corporate governance.

“This firm characteristic is likely to be statistically more stable and persistent than that of individual funds which could be idiosyncratic or volatile, depending on their managers or their markets,” the research paper said.

The two researchers pointed to the Federal Government’s demand for APRA to collect more complete data from superannuation funds and said that using their proposed new performance metric, the key additional data that would be required from superannuation entities was quarterly asset allocation data of the total fund of the firms.