The Australian pension industry, known locally as ‘superannuation’, has seen unparalleled growth compared to its international counterparts, making it the fifth largest pension market in the world despite Australia’s small population.
As a result, the industry that manages these assets now has a huge breadth of providers (more than 80) from a variety of beginnings.
This has drawn scrutiny from the Australian Prudential Authority (APRA), the country’s financial services regulator, who instigated a test, Your Future Your Super, to identify underperforming funds.
The results from the test were recently released, and 13 funds were assessed to have failed this test. They now face severe consequences. They will need to inform their constituents, advise them to consider switching to a better-performing fund, and potentially force the fund to close if they continue to fail future tests.
APRA releases the data they use to make this assessment.
At Macrobond, we drilled into this data and asked the question, what makes these underperforming funds different to those that passed the test?
Firstly, looking at the rolling three-year returns of funds that failed the test vs all funds, we can see consistent underperformance relative to the peer group, with the majority of funds always being in the bottom quartile.
But the dispersion between passing and failing funds has decreased considerably. In the past three years, the dispersion between the median failing funds vs the median passing fund fallen from 130 bps to just 30 basis points per year.
We can try and explain this by looking at the funds’ benchmark allocations to identify whether failing funds made different decisions on average vs their peers. Here we noticed that the 13 failing funds tended to have a lower allocation to so-called “defensive” assets like fixed income and property.
Another area to assess is the cost of these funds. If the funds that failed the test are considerably more expensive than their peers, this may give insight into the APRA’s decision.
What we see is that historically, these funds were more expensive on average, but over the past three years, their fees were broadly in line with the rest of the industry. And in the last year or so, their fees were even slightly lower on average.
We also see that overall, the industry’s fees have trended downwards and the dispersion between the cost of funds has decreased.
Historically, there were considerable differences between the 13 funds that failed and those that passed in terms of returns and fees. Those are possibly explained by allocations to more defensive assets. But in recent years, those differences in performance and fees appear to have decreased considerably. It seems the majority of these 13 failing funds are already on the right track to pass future tests – a sign that APRA’s aim of a more consolidated super industry is being realised.