When the virtues of capital preservation win the crown

If ever any proof were needed of the validity of long-term investment and astute asset allocation, it has been provided by the FE Super Review quantitative analysis of superannuation fund investment settings.

At a time when the Productivity Commission (PC) has canvassed the use of a superannuation fund Top 10 for the selection of default funds, what the FE Super Review analysis reveals is which funds have plotted the steadiest path in terms of their listed investments.

FE looked at the listed allocations utilised by superannuation funds to determine which of them had managed to best pin-point those deserving of an FE Five Crown rating and confirmed that, on a per centage basis, scale and scores of investment options are not necessarily key determinants.

Among the top 15 funds identified by the analysis, four can be regarded as small-to-mid-sized. Just as importantly, just two of the so-called “mega-funds” AustralianSuper and REST made it into the count.

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Equally importantly, the data confirmed what the superannuation industry has known for some time – that the multitude of listed investment options offered by larger retail players such as Colonial First State or MLC Investments does not necessarily translate to the delivery of a better average outcome when compared to the limited menu offered by industry funds.

The superannuation fund taking out top spot was NGS Super, which covers the non-Government schools sector and which, from 12 listed investments, offered its members 10 five-crown funds.

NGS chief investment officer, Ben Squires said the outcome represented a validation of the board’s objective to generate a positive net return outcome for members.

He said NGS Super had been pursuing a somewhat different direction in terms of its listed exposures since 2015/16 based on seeking out quality companies and returns and minimising downside capture.

“This led us to looking at managers we’d never looked at before – something which worked well in terms of minimising the downside,” Squires said.

He said he believed it was important to determine the view of the board on how much risk they were prepared to tolerate, and that the approach adopted by NGS Super had been coloured to some degree by the volatility which had occurred in 2011/12 when there had been greater use of growth managers.

However, he acknowledged that while NGS Super’s asset allocation had worked well in the current environment, the settings were such that the fund would likely miss some upside when growth managers once again came to the fore.

EISS Super, the fund covering members in the NSW electricity industry offered members five listed options, three of which were rated five crowns – something which its chief executive, Alex Hutchison attributed to the fund making investment decisions premised on its member demographic.

He said capital preservation represented a significant part of the fund’s thinking in terms of its asset allocation in circumstances where EISS Super had significant number of older, high-balance members.

“We know we have to take account of preservation and that means that while we might not shine during strong markets, we weather periods of volatility such as those we’ve been experiencing really well,” Hutchison said.

As written elsewhere in Super Review, the best-performing funds under the Crown Ratings system are those that prioritised consistency. When you consider the methodology behind the Crowns, it’s not surprising that such funds were rewarded.

The ratings are based on alpha, volatility, and consistency and strength of performance, measured across the three years prior to each rebalancing, which will occur biannually.

Specifically, the ratings identify funds that have displayed superior performance in terms of stock-picking, consistency of outperformance against a credible benchmark, and achievement of results at a relatively low risk.

According to FE, “certain types of performance are more valuable than others”. As such, the drivers behind performance recognised by a Crown Rating are those that it determines as intrinsically more valuable to superannuation fund members in nature, because of their solidity.

The top 10 per cent of options were rewarded five Crowns, the next 15 per cent four Crowns, and each of the remaining three quartiles were given three, two, and one respectively.