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Is this really the best way to remove the super underperformers?

Past performance is not a reliable indicator of future performance. Unless it relates to superannuation funds it seems. The release of the Your Future, Your Super (YFYS) performance test results shines a bright light on underperformance.

MySuper funds, which account for $900 billion in assets, around a third of all superannuation savings, are the default options for employees who don’t select their own fund. Greater transparency and increased member engagement will benefit both members and the industry. The long-term returns these funds achieve will determine how comfortable members will be in retirement.

Funds which are persistently underperforming, particularly those that charge high fees, have no place in a compulsory industry. Frontier supports increased scrutiny for the benefit of improving all member outcomes.

However, predicting future performance from past performance is difficult, even for professionals. ASIC reviewed over 100 academic papers from the last 40 years and concluded:

“Good past performance seems to be, at best, a weak and unreliable predictor of future good performance over the medium to long term.”

In addition, ASIC concluded performance comparisons can be quite misleading if not done properly. Importantly, returns are only meaningful if adjusted for risk/volatility or comparing "like with like".

Member outcomes

Maximising net returns (after fees and taxes) over the long term is the most important way in which the superannuation system contributes to adequate and sustainable retirement incomes.

Understanding the risks associated with investment is important for assessing the relative investment performance of funds and products, both retrospectively and into the future.

However, the YFYS annual performance test neither measures the return members achieve, nor adequately measures the risks a fund took in achieving the returns. The performance test compares each fund’s returns over the last seven years with its strategic asset allocation.

The performance test only assesses a small part of member outcomes:

  • The test assesses how well a fund has implemented its chosen strategy, not whether it is a good strategy.
  • It ignores actual returns and the CPI+ objectives of funds that reflect long term member outcomes.
  • It does not incorporate most risk adjusted improvements from more diversified exposures.
  • It is not a peer relative assessment of underperformance (unlike the YourSuper comparison website and some heatmap measures).

The test also assumes a common approach to establishing portfolios - namely a traditional approach of setting a strategic asset allocation and implementation around a goal to outperform the strategy. In practice portfolios are built in a variety of ways. In the current challenging market environment, a total portfolio approach that considers these two elements together may well provide better outcomes to members over the long term. Unfortunately, such an approach could see a fund fail the YFYS performance test and so may now be less likely to be adopted by funds.

A fund with an investment strategy which will deliver poor long-term member outcomes, but is well implemented, will be judged better than a fund with a good long-term investment strategy but its implementation has been poor in the short term.

The chart below compares the actual performance for each fund with its performance test result. The chart also shows the asset size of each fund.

The chart highlights it is not just poor performing funds which have failed the test. In part, this reflects lifecycle funds, where the overall fund can fail the test despite some of the underlying options producing good returns.

Observing that some funds which have returned highly for their members have failed the test, while other lower returning funds have passed the test is intuitively hard to reconcile and could lead to consumer confusion and disengagement – the opposite of the desired outcome.

In addition, while a number of small funds failed the test, size isn’t a key indicator of the test result. Large funds also failed, showing increased scale isn’t the panacea to good member outcomes.

Indeed, the distribution of ‘failed funds’ appears to be quite random when viewed by return and size – two factors many would assume to be indicators of success.

Persistent performers

The Government and the regulator continue to reference addressing ‘persistent underperformance’. This reflects that superannuation is a long-term investment and that even good funds will suffer from periods of underperformance.

The performance test measures funds returns over seven years (eight next year), reflecting the period since the introduction of MySuper. However, the test doesn’t differentiate between funds which have had one or two years of poor recent performance from those funds which have persistently underperformed in each, or even most, of those years.

The chart below examines the number of years each fund has outperformed the relevant Super Ratings median fund in each of the last seven years.

Funds which have outperformed the median fund in only one or two years in the past seven, and so underperformed in the rest, could be considered ‘persistent’ underperformers. However, the majority of these funds have not failed the performance test. Indeed, there are some funds which have never outperformed the median in any single year but have still passed the performance test.

The test does not allow much leeway for funds who have made improvements to their approach and performance in recent years and therefore are on a good trajectory to become a higher performing fund in the near future. Such a transition would generally take longer than the one year allowed post the initial test failure notification.

Adjusting for risk

When comparing funds on performance, it is important to make sure you are comparing ‘like with like’. Super funds offer a range of different super products. These products have different levels of risk and thus different levels of expected reward.

A high-growth product would be expected to return more over the long run but might experience higher highs and lower lows in the short term than a balanced product. In turn, a balanced product would be expected to return more in the long term, but with increased volatility in the short term than a conservative or cash-based product.

The chart below plots the performance of each MySuper fund over the last seven years against the level of risk (measured by the volatility of return). As expected, funds which have a higher return have typically also had higher risk.

Several funds that have failed the test are very close to the trend line of the overall population. This highlights the binary nature of a pass or fail and means there are several funds passing ‘close to the line’, while others have missed out by very thin margins.

Additionally, a number of funds with higher risk strategies have failed the seven-year test. Many of these represent very long term ‘lifecycle fund’ stages developed purposefully for their youngest members.

Engaged members

Great member engagement is beneficial to the superannuation system if it leads to better decision making. However, attempts at better engagement which only lead to member confusion or poor decision making should be avoided.

Funds who ‘fail the test’ will be required to send their members a letter informing them of this result and setting out, in standard terms, a range of information for members to consider. What should a member do if they receive a ‘fail’ notification from their fund?

  1. Visit the YourSuper comparison tool and compare your fund’s performance and fees with other funds. Be more concerned if your fund has poor performance compared to other similar funds.
  2. Use the ‘compare’ functionality of the comparison tool to investigate the performance of your fund over three and five years as well.
  3. Do your homework on your fund’s performance – check out the fund’s website, read the annual report and attend the annual member meeting.
  4. Understand the other services offered by your fund, especially the insurance coverage. Switching funds can have a significant impact on your insurance benefits.
  5. If you are thinking of switching to another fund with better performance, make sure you understand its risk level. If it’s a higher risk fund, are you comfortable with the possibility of more volatile returns?


David Carruthers is a Principal Consultant and Head of Member Solutions at Frontier Advisors. A full copy of this report can be accessed here. This article is general information and does not consider the circumstances of any investor. Investors should seek individual advice prior to taking any action on any issues raised in this article.


September 05, 2021

Thank you to David for a fine analysis.

Contra - It is somewhat problematic that the entire APRA analysis is based on a caveat. Like any model we have the "garbage in-garbage out" issue however, in this case we have the ludicrous situation where the modelling agency actually relies on the "garbage in" as justification for results. So to paraphrase, previous data points are generally unreliable (without significant underlying analysis and adjustments) but I'm going to use that raw data anyway to rely on what I will then declare is a subsequently "robust" outcome......breathtaking in its simplicity (which is great for PR) but similarly easy to dismiss due to a lack of rigour......for the sake of convenience.
This "macro" problem is merely exacerbated by a myriad of further oversimplifications used by APRA such as ignoring that small thing call "risk adjusted", portfolio construction constraints/preferences, underlying Member cohort analysis/requirements (and thus optimal exposure to sequencing risks) and the reliance on questionable underlying benchmarks/indices........but all that would take away from a good story wouldn't it.......

September 05, 2021

David Carruthers has done a good job of detailing the deficiencies of this new scheme. By comparison our national newspapers have simply accepted what they are told without applying any scrutiny. David's piece raises several points worth exploring for any budding Hunter S. Thompsons out there. As he points out in the beginning, all funds and financial planners must state with regular monotony that "Past performance is not a reliable indicator of future performance" or something similar. Yet this scheme is based on the key assumption that past performance is a strong indicator of future performance. So much so that fund managers must warn their customers that they are in a poorly performing fund and should look elsewhere. There is obviously a clear contradiction here. So when will the government say that the past performance warning no longer applies, and that fund managers do not need to print the warning any more? When will a journalist put the question to government? I don' think anytime soon.

It is also instructive that even Warren Buffett is likely to fail the APRA test. Over the last seven years his performance via Berkshire Hathaway has been 11.1% pa vs 13.6% pa for the S&P 500 total return index. I don't know what benchmark APRA would consider suitable for Buffett, but I think the US market is a reasonable one. He has clearly underperformed by 3.5% pa, well beyond the "fail" measure of 0.5% pa proclaimed by APRA. Buffett would have write to all his shareholders saying they are in an underperforming investment and should look elsewhere. If the underperformance continues into next year Buffett would have to declare that he could accept no new shareholders. Yet Buffett is lauded as one of the most successful investors of all time. His annual meetings attract 40,000 disciples. What value is there is a scheme that would declare one of the world's most successful investors a failure? What am I missing here?

September 05, 2021

'"Past performance is not a reliable indicator of future performance" or something similar. Yet this scheme is based on the key assumption that past performance is a strong indicator of future performance.':

Spot on.

What constitutes a middle aspiration my-super fund likely to relatively under perform in the order of <= -2 sigma?

One that has poor risk control as demonstrated by history of simultaneous well below average or negative real total return and well above average volatility?

Doris Day - "Que Sera Sera"?

September 05, 2021

A small correction: the S&P500 Index returned 14.6% pa over the last seven years vs 13.6% pa as stated above. So Buffett underperformed by 3.5% pa. How would APRA view this?

September 17, 2021

If anyone couldn't make money last year or worse, lost money and/or underperformed the index, they really need to be sacked because it was easy to do the former. Even if you did nothing and bought nothing but just held, you still would have made money. Underperforming a market where everything was on sale, that's just lazy. Buy when there is blood in the streets and you'll make money, it's not hard.

September 04, 2021

This is yet another example of the new post-expert (“only government knows best”) pathology that is evident in many of these horrendously put together government programs. Post-expert, which is THE method du jour of the liberal party, is an ideology that starts off with the premise that ANYONE in the private sector cannot be trusted, because they have vested interests and by default don’t want good consumer outcomes. Field experts must be shunned and only government (or bureaucrats usually with no practical experience) can put it place measures to protect consumers. These measures must also be done very quickly to fit within an election cycle, speed is a feature of post-expert. Post-expert also never incentivises good behaviour, it always disincentives or uses punishment, because punishment is popular with the public. Because the intentions are always noble (reducing costs, improving standards etc), they are given carte blanche by the public and political opponents to rapidly implement clumsy reforms that do nothing but showcase the governments lack of skills and ignorance of the subject matter. FASEA, a wretched embarrassment that has already been disbanded and buried, is an example of of the post-expert regulatory approach, it’s design was totally butchered by a bunch of clueless academics and ideologues, none of which had any domain-level experience in the subject matter they were tackling, a great opportunity was missed. Undeterred by this, and clearly buoyed on by this, we now have this debacle of a ratings scheme which has lack of skill, knowledge and expertise written all over it. It’s crude reduction into a binary pass/fail score and most importantly the YSYF brand, will be continually used to obfuscate any poor design/outcomes behind a bite sized piece of propaganda, so giant a pat on the back for Josh and Jane no matter what (“we identified underperforming funds”). When YFYS is spoken about on TV and the passes/fails are reported, it will APPEAR to the public to be very effective in a 30 second soundbite or on a news feed, but under the hood it is a right mess. Lamentably, these nuanced discussions are only really taking place within the industry and people cannot afford advice anymore (because of the government) to help them tackle this at the individual level. What makes the lack of skill so evident in this particular program is that nobody in APRA seems to understand that asset allocation is the primary driver of returns, their ignorance of the very basics is so glaringly obvious. Measuring your own investment selection (implementation) against your own (chosen) poor driver of returns is an idea so amateur, that one has to wonder if this was hand balled to the kids in the grad program. This aspect alone is evidence that APRA are totally unfit to design this, lack the fundamental basic knowledge and desperately need help from those evil experts in industry. To really understand a fund’s performance, at a bare minimum you need to understand it’s pattern and consistency of returns, it’s risk adjusted return (with volatility adjustments for unlisted assets or an illiquidity risk factor), the effectiveness of its chosen SAA, the effectiveness of its investment selection for that SAA, it’s liquidity and lastly the impact of its fees. But all of this would undermine the post-expert goal, which is to quickly generate a program that punishes (public love this) with an easily consumable soundbite (pass/fail). Government knows that driving a positive message into the social media feeds of a distracted population (“we are improving performance, we are improving advice”) is more important than outcomes. Outcomes and nuance are simply too complex to consume when you are scrolling, even when it comes to your life savings and boy does this government know it. Bad outcomes are now OK, so long as they are popular, sadly messaging is the only game in town.

September 17, 2021

Sorry T, but respectfully, can you please use Shift+Enter to break your paragraphs up ? Your comment is probably very interesting, but it is also almost impossible to read because of the formatting.

September 01, 2021

PYS, PMIF and now YSYF - what do they all have in common. The Government ignored industry and expert feedback during the consultation process (including APRA itself for PYS).

Ron Bone
September 01, 2021

In my opinin. 'Super' is a government regulated socialist dictate with serious flaws. Firstly we are hiding it from being a tax on businesses, which it is. It is also a disincentive to hire. Then there is the fact that people under 40 need to spend on family and housing along with travel in the era they are fit. On retirement we simply are wearing out, and retirement income is only significant for basic needs and health. The worst aspect is Trade union (industry) super funds, which are so large they can be influential in destroying capitalism by their huge investments being able to enable socialist directors on a company board or pressure directors to follow their agenda. In writing this I also recognize that a substantial amount of investment is overseas. In effect they create jobs outside of Australia. Trade union funds doing so is perhaps an oxymoron. Lastly, super is put in the hands of the individual, and the vast majority have not got the education to know how to do it. Better to go back to a pension, simpler and more effective.

Neil Cox
September 01, 2021

Thanks Ron for standing up for the mad right wing. Yes it's all reds under the bed and the poor little battling billionaire. Pity help the average worker getting a fair deal. Their productivity has gone through the roof and wages through he floor. We may as well take away any chance of a slight financial retirement for them just to put the icing on the cake..

September 04, 2021

Wow! Did I just read that? I thought it was a press release from the McCarthy era looking for commies!
Super is the Sovereign Wealth Fund for Australia, and a step out of poverty in retirement for Joe and Jolene Average. It is the envy of the world, but not, apparently, supported by greedy employers.

September 04, 2021

Wrong on so many counts Ron. This 85 year old retiree is not just "simply wearing out". I have been as active in the community since retirement as before, and a lot better off since switching super to an industry fund. Regarding education of the majority, personal financial issues should be included in early educationi, including hands-on experience from retirees.

September 01, 2021

Thanks for your awesome work David. This whole exercise (YSYF performance tests) seems to be a knee jerk reaction to some ill thought out political directive.

September 01, 2021

I am a financial advisor of 12 years, I have spent all my last 1.5 days work responding to clients who extremely anxious because one of the companies we use was named and reported as underperforming. The fact that this company has several super platforms and hundreds of options is completely left out of the conversation by the media. None of my clients were in any of these options. If this YFYS data is trying to improve consumer education and make people more informed it is 100% off the mark.

Graham Hand
September 01, 2021

Thanks, Adam, good point, at this stage, APRA has focussed on a small number of MySuper funds and the entire super fund is being labelled as underperforming.


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