Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 336

Four major insights from APRA’s super heatmap

Large super funds have been waiting anxiously for the release of the regulator’s ‘heatmap’, which assesses the performance of every MySuper product. While many trustees will be relieved by the good results, others will be worried and are likely to face pressure from APRA to perform or merge. The heatmap identifies 416 funds on this link.

The Excel spreadsheet looks unwieldy at first, but it includes a 'User Guide' tab and an explanation of the colours. Funds with dark red or orange for performance or fees will face more scrutiny, and white is good.

MySuper funds are supposed to be simple and low cost, and are the only funds which can accept default contributions. They are usually balanced portfolios with a growth emphasis, and hold about $800 billion of the $3 trillion in super.

APRA defines the objectives and use of its heatmap as:

“The objective of the Heatmap is to provide credible, clear and comparable insights into the outcomes provided by MySuper products in a number of key areas. The Heatmap is expected to drive improvements in outcomes for members by holding RSE licensees publicly accountable for their performance, and in particular highlighting areas of underperformance.”

APRA Deputy Chair Helen Rowell said on the release of the report:

“Australia’s superannuation system delivers sound outcomes for most members, but APRA is determined to weed out the industry’s underperforming tail ... we directly contacted the trustees of the worst performing products and asked them to provide or update action plans outlining how they will address identified weaknesses. If they are unable to make substantial improvements in good time, we will consider other options, including pressuring them to consider a merger or exit the industry.

APRA identified four major insights from its research:

Key insight #1: significant variation of results

Although the funds were all MySuper compliant, a wide range of results were found. APRA focused on five-year performance as the longest time horizon available, although it should aim for at least 10 years. Performance over shorter periods can be affected by cyclical factors where funds with solid processes have not seen sound strategies pay off.

APRA differentiates between ‘single-strategy products’ with specific asset allocations, and ‘lifecycle products’ where the portfolio varies with the age of the member (eg, more into bonds as a member ages).

The five-year net returns on funds with over 60% allocated to growth assets ranged from 5.1% p.a. to 9.5% p.a. in single-strategy products (median 7.4%) and from 5.6% p.a. to 9.6% p.a. (median 7.9%) in lifecycle stages. Offered by many leading brands, 23 funds performed well below the industry average.

APRA makes the valid point that many other fund comparisons use a wide range of growth bands (such as 60% to 80%) in evaluating peer performance, which disadvantages funds at the lower end of the scale when markets are strong. Instead, APRA has taken the average allocation to growth assets and compared the funds with their five-year Net Investment Return (NIR), as plotted below. It shows that even allowing for risk, results vary significantly.

Key insight #2: underperformance in all industry segments and risk profiles

Underperformance was found in both single strategy and lifecycle stages with similar allocations to growth assets.

APRA built a Simple Reference Portfolio of passive, low-cost, liquid investments as a reference point. The figure below highlights underperforming funds and the level of underperformance. The colours are the same as used in the main heatmap, with dark red for poor results and white for acceptable (APRA deliberately avoids the endorsement implied by green).

Key insight #3: more single-strategy products outperformed than lifecycle products

APRA reports that of the 59 single-investment strategy products, 34 (or 58%) outperformed the Simple Reference Portfolio over the five years to 30 June 2019. However, of the 204 lifecycle stage products, only 74 lifecycle stages (or 36%) outperformed.

Following the introduction of MySuper, many retail funds rushed to lifecycle solutions, putting more money into defensive assets as a person ages. This has not paid off as equity markets have rallied strongly, and now, new bond investments are rolling into funds with rates less than 1.5% and long durations. We should expect many of the lifecycle strategies to be critically reviewed by APRA, trustees and members.

APRA has finally taken a stance on the definition of ‘defensive’ assets. Some super funds include infrastructure and property as defensive, where in reality, they have growth characteristics rather than the portfolio protection of government bonds. APRA has decided that listed infrastructure and property should be classified at 100% growth, while unlisted are 75% growth and 25% defensive. 

Key insight #4: fee impact varies significantly based on account balance size

Figure 16 below shows the range of administration fees charged to MySuper products as a percentage of a $10,000 account balance. As a sign of the impact of expenses on low balances, 42% of funds have a fee in excess of 1%, with some over 1.5%. These are supposed to be low cost, simple options. Again, APRA uses the heatmap colours to show which fee levels are unacceptable.

Responses to the heatmap

No fund should only be judged by the colour in one category. Some of the more expensive funds are also the top performers. There are winners and losers among both the retail and the industry funds, and peak groups have advised fund members to consider a wider perspective. 

The Financial Services Council jumped to defend retail funds, with CEO Sally Loane saying:

“The heatmap may tell you that other funds have had higher returns over five years, but if you’re close to retirement you might be far more concerned with how your fund is managing the risks of a market downturn to safeguard your retirement savings. The heatmaps don’t reflect that ... The heatmap doesn’t tell you how your super has performed over your lifetime, it can’t tell you whether your fund invests in accordance with your ethical and philosophical beliefs, and it doesn’t tell you what additional services they offer to help you manage your savings.

The media headlines have already focussed on particular examples, and their trustees will need to address the results. For example, some BT Super funds are flush with deep red colours and must face APRA’s gaze, and only 15 funds scored ‘white’ across all categories.

An industry fund with some deep red, Christian Super, which traditionally takes a more defensive investment approach, said the heatmap may cause investment teams to focus too much on peer performance resulting in herding of results to aviod becoming an outlier.

The Association of Superannuation Funds of Australia (see ASFA website) has also urged caution, with CEO Martin Fahy saying:

“Let’s be careful however not to jump to erroneous conclusions that may impact the entire category, or damage member outcomes with knee-jerk reactions from anti-retirement groups … achieving sound investment performance and broader member outcomes is a long-term journey, it’s not measured in terms of years, it’s measured in terms of decades.”

Other industry participants, such as SuperRatings, question why APRA is even publishing such results, arguing a regulator should be regulating not managing a public scoring system 

The bottom line is the industry must accept the regular updates from an emboldened APRA, and it just became even more difficult to discharge the duties of a super trustee.

 

Graham Hand is Managing Editor of Firstlinks.

 

1 Comments
SMSF Trustee
December 12, 2019

A few comments:



1) Lifecycle products are nonsense. An attempt to turn individual indifference (selecting the 'default' option seeming to imply that the member is indifferent) into uniformity. And the old theory that you need to increase the fixed income and reduce the growth as you age is stupidity. If you went into a high growth version when you started work in your 20's and have kept contributing then you'll probably have a portfolio that has grown enough to have plenty of room (buffer) to withstand more of the same volatility you've been living with for 40 years!

2) I disagree with the interpretation of the chart in key insight #1. Apart from a few strong performers at each risk level, that looks to me like a very tightly bunched group all along the risk spectrum. Also, despite all the headlines about 'weeding out underperformers', there don't seem to be any in that chart. At least not in the same sense that there are clear outperformers. (There are no dots as far below the averaging line as there are dots above it.)

3) Christian Super's comment is curious. Funds have been herding for years, thanks to all manner of performance tables. This heat map is just another performance report. But isn't the whole idea of introducing MySuper to try to make sure that everyone gets a similar outcome to everyone else, with no one lagging well behind? If by some miracle everyone could do whatever those handful of top performers did, then we'd just get a report that showed everyone close to a line running at a higher trajectory. Presumably everyone would then be happy that all had herded to the same result! Though I'm sure that the media would point out the funds that are a bit below the average and lambast them for not doing as well as others, even though they did brilliantly!

 

Leave a Comment:

     

RELATED ARTICLES

Checking the temperature of the APRA heatmap

The opportunity cost of low fee structures

APRA December 2012 Quarterly Superannuation Performance

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Superannuation

'It’s your money' schemes transfer super from young to old

With the Coalition losing the 2022 election, its policy to allow young people to access super goes back on the shelf. But lowering the downsizer age to 55 was supported by Labor. Check the merits of both policies.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.

Superannuation

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Shares

Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.

Economy

Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.