New research from Frontier Advisors highlights the misplaced focus and potential pitfalls of the Productivity Commission's proposed 'best in show' list.
Given the strong imperative for the superannuation sector to consolidate, the white paper sought to uncover if the focus on forcing consolidation is misdirected.
"The focus on what should drive that consolidation shifts from choosing the best-performing funds to removing underperforming funds," the Best in show or worst to go paper writes.
After analysing variables and correlations between size, net returns, cash flows, allocation to growth assets and fees, Frontier found that smaller funds have "unique advantages" and should not be discredited based on size.
|Sponsored by BNP Paribas|
The race for ESG leadership in APAC takes shape
While a relationship between fund size and net return exists, Frontier said this factor is by no means conclusive.
It analysed two small funds less than 1% the size of AustralianSuper ($150bn) and found they were the highest-performing funds over the last three years.
"While logic would suggest the lowest operating costs should result in the lowest fees being charged to members, this relationship doesn't always hold true either," Frontier said.
The asset consultant found the movement of funds in and out of the top 10 was harder to predict.
Of the top 10 performing funds in the three years to 30 June 2018, four dropped from the list. This happened again when Frontier conducted the same comparison six months later.
Underperforming funds, however, are more likely to repeat their performance. Over a six month window, eight of the 10 worst-performing funds held onto the bottom 10 positions.
Frontier principal consultant David Carruthers said the focus should be on the best outcomes for members, not reducing the number of funds for the sake of it.
"To determine the value a particular fund offers requires an assessment across a wide range of factors that includes the level of fees and costs, size of assets, performance across a range of time periods, risk profile and qualitative factors such as member services."
Carruthers added APRA's new member outcomes legislation will set a minimum standard of delivery, across a range of areas that funds need to provide.
"That would give both funds and members certainty and confidence around what constitutes success."