Regulator Takes Aim at Industry Funds

  • 17 Dec 2019
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Regulator Takes Aim at Industry Funds

The Australian Financial Review reported today that APRA had finally taken action on one of the great misrepresentations in the superannuation industry.

Given Intralink’s focus on risk management as part of our objective of minimising risk for any return objective, we are happy to see the regulators at last pick up on this issue.

You would think the asset allocation or risk profile for different balanced funds would be similar. For example, would you assume that all Balanced Funds would have a similar split of growth and defensive investments? If they did, it would be easier to compare performance, although we would need to see how they performed in different market conditions and definitely in a crisis.

Many people have heard reports of the best performing funds and hopefully all of our clients also know the relationship between risk and return. A higher growth allocation (risk) relative to defensive assets (conservative), in general should produce better long-term returns.

However, there are certainly periods when growth assets perform very poorly, often for many years. Unfortunately, what some describe as Balanced, we would describe as High Growth. The requirements put on advisers and retail funds are quite strict in terms of describing risk levels.

Industry funds have never been under the same scrutiny and what has been known by many for a long time, has at last come to APRA's attention.

The following is from an article in today’s Australian Financial Review:

“There are calls for better consumer protection after Hostplus' "balanced" superannuation fund was exposed by the regulator as being heavily weighted to risky assets”.

“The Australian Prudential Regulation Authority's heat map assesses Hostplus' flagship MySuper product as having a whopping 93 per cent allocation to growth assets.

This enables the $43 billion industry fund for hospitality workers to top the league tables given it is up against funds with growth asset allocations of between 60 to 80 per cent”.

Chris Brycki, the chief executive of online investment business Stockspot, is among those who have long accused Hostplus and others of misclassifying assets to game the system.

He has called for tighter controls on how funds use terms like "balanced", "growth" and "conservative" to help protect consumers.

"What APRA has pointed out is that for anybody to assess super properly, you can't just look at absolute returns, because the funds are inconsistent and often misleading in how they categorise the risk" Mr Brycki said.

"And the ratings agencies just swallow whatever the funds tell them."

At Intralink, we try to be as transparent as possible and while risk management goes well beyond asset allocation, we welcome all actions to bring this misleading behaviour to light. This has been an issue that is rife across industry funds and the deception has been a large part of Industry Fund advertising.

For example, industry fund heavy weight Australian Super’s major default fund “Balanced” has about 80% growth exposure.

That is why we try to educate at Intralink. These types of misconceptions are everywhere.