POWERED BY MOMENTUM MEDIA
Has COVID-19 volatility undermined APRA’s heatmaps?
The Australian Prudential Regulation Authority’s (APRA’s) heatmap process may have been thrown into disarray by the volatility generated by COVID-19 with new analysis showing things have changed dramatically.
The analysis, carried out by Frontier Investment Consulting, raises real questions about APRA’s initial heatmap process and its future relevance.
The Frontier Advisors analysis of superannuation fund performance through the volatility of March and April found the expected relationship between risk and return largely disappeared following recent market turmoil and said this had implications for the assessment of funds using APRA’s heatmaps with the ranking of funds as either over or under performing shifting significantly since the fund performance assessments were published in December.
“The three year performance to 30 June, 2019, of each MySuper fund showed a strong, positive correlation between funds’ growth/defensive ratios and returns. This formed the basis for APRA’s published heatmaps in December with under-performing funds receiving yellow, and more worryingly red, warnings from the regulator,” it said.
“However, when three year performance to 31 March, 2020, is reviewed not only has the risk/return correlation largely disappeared, but funds have scattered around the median with several outperformers having lost their preferred status and now finding themselves in yellow and red territory.”
The analysis said Frontier had found that almost one in five funds changed their status as an under or over performer over this brief period and highlighted the difficulty in assessing the merits of a fund based on a single measure of risk.
Commenting on the outcome, Frontier principal consultant, David Carruthers said that attempting to assess performance without a deep understanding of each fund’s approach to risk could lead to the wrong conclusions.
“Being higher or lower risk is neither a sign of a good or bad fund. 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,” he said.
“Our analysis shows standard deviation was a considerably better predictor of a fund’s outcome in the March quarter than the fund’s growth ratio, which is the metric used in the heatmaps. 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.”
Recommended for you
In its pre-election policy document, the FSC highlighted 15 priority reforms, with superannuation featuring prominently, urging both major parties to avoid changing super taxes without a comprehensive tax review.
The Grattan Institute has labelled the Australian super system as “too complicated” and has proposed a three-pronged reform strategy to simplify superannuation in retirement.
Super funds delivered a strong 2024 result, with the median growth fund returning 11.4 per cent, driven by strong international sharemarket performance, new data has shown.
Australian Ethical has seen FUM growth of 27 per cent in the financial year to date.
TOP PERFORMING FUNDS
ACS FIXED INT - AUSTRALIA/GLOBAL BOND
Fund name
3y(%)pa
1
Spire Oaktree Opportunities XI Second Close
32.68 3 y p.a(%)
2
DomaCom Lot 21 Chellaston Road Munno Para West SA 5115 Australia
31.72 3 y p.a(%)
3
Spire Oaktree Opportunities XI First Close USD
31.36 3 y p.a(%)
4
Fidante Credit Suisse Global Private Equity
29.60 3 y p.a(%)
5
Global X GlobalX FANG+ ETF
27.64 3 y p.a(%)
