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Self Managed Super Fund (SMSF) Article
APRA exposes problems in super return data

By Tony Negline.

This article may be out of date.

30th July 2009

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In late June the Australian Prudential Regulation Authority released a new Working Paper titled, "Investment Performance Ranking by Superannuation Firms".

Not exactly a title to get the heart pumping.  Nevertheless the paper will be of great interest to anyone who has some involvement in superannuation because it identifies the limitations in data currently used in industry performance tables.  It proposes an alternative method for ranking super fund investment returns and also speculates how the financial planning process should be changed to appropriately take into account this new methodology.  They also find time to speculate on why Self Managed Super Funds have been growing so fast.

All these issues addressed are some vital pieces in the super landscape.  They can't be ignored by anyone wanting the best from their super investments.  That said many of the issues raised by this research could apply to all non-super investments.

The paper was prepared by Wilson Sy and Kevin Liu who presented it to the "Australian Colloquium of Superannuation Researchers" which the University of New South Wales holds in July each year.

The report begins by evaluating how performance data is collected and then used to determine the performance of super funds.

Sy and Liu note that "there are no laws governing the creation, destruction, naming, classifying or performance recording of managed funds.  It is well-known that there are more … Australian retail unit trusts and managed investment schemes than there are stocks on the Australian Stock Exchange."

The lack of legislative laws arises even though there are many well known inherent errors in the pricing of retail unit trusts and managed investment schemes.

Regrettably "in some cases, the fund pricing errors have been systematically exploited by executives in well-known … mutual fund market timing scandals, where large cash flows from switching further distorted unit prices … the recently exposed Madoff fraud, show[s] that many of the mutual funds of funds could have misleading fund prices over long periods of time."

Does this mean we need to question the performance data which is made publicly available?  Sy and Liu say that the raw accounting data used to rank investment performance is not audited.  The calculation methodologies are also not audited.  It appears that the performance data supplied is simply accepted as accurate.

They note that most professionals "who collect the data for client advice work do not place undue importance on them, because they are aware of their limitations".  These professionals collect information direct from the fund managers and make their own judgements.  Only a small minority of DIY investors will be given direct access to actual fund managers.

Sy and Liu argue that comparing managed funds is often fraught because there is an inconsistent set of definitions in use in the investment marketplace.  For example they point out that in Australia a "balanced fund" can have between 16% and 85% of its portfolio invested in high risk assets.

Moreover a proper comparison between investment funds depends on having long periods of data.  Sy and Liu say that at present much of the old data available today is poor quality and is further compromised by financial services industry "volatility".  They use this term to refer to the changes that are made to managed funds over the years including constant ownership changes and personnel rotations.

All these arguments are used to present the case for the need for a new performance methodology.  Our researchers have developed one that they call Risk-Adjusted Value Added or RAVA.

Liu and Sy used this process to compare the performance of 115 Australian super firms that APRA who collects data for under its legislative charter.

They found that, "on average, value adding from active [investment] management appears statistically to be unable to overcome higher costs associated with attempts to exploit market inefficiencies".

The RAVA method shows that firms that are down the bottom of the rankings have the "highest probability of remaining [at] the bottom … from one year to the next."

Of the top firms in the RAVA rankings in 2002, only 32% were still in the top rankings in 2006.

The authors says that the "inability of investors to reliably compare individual funds or investment options … has created an information asymmetry in the market.  This together with inadequate fund disclosures … has led to a form of market failure, where given the necessary resources many investors may chose to minimize their dependence on the managed fund market. This may explain the recent rapid growth of self-managed funds to become the largest superannuation sector in Australia … However, for the bulk of workers who have insufficient assets or other resources, the self-managed alternative is not economically justifiable and they remain captives of the institutional market."

Sy and Liu argue that the traditional approach to investing – selecting an investment strategy based on the investor's age, income and risk preference and then selecting investment products with the help of financial advisers – is "unreliable due to [the] information asymmetry" discussed above.

The authors believe that a better approach would be to firstly select several top firms using their RAVA approach then compare product offerings taking into account the services relevant to the investor (insurance, financial advice and investment strategies).

Given that this approach to financial planning runs counter to how ASIC prefers financial advice to be provided it will interesting to see how it and other interested parties react.

You can download a copy of the document (in pdf format) at:

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