It's August, we're finishing our taxes, getting our finances in shape, and reviewing letters from our financial advisors/super fund. We don't necessarily pay too much attention to these, until we read in the weekend paper's piece about how super funds overall had performed over fiscal 2017. "How did MY super fund perform relative to the peers?", we ask ourselves. It is THEN when that we fall into one of the greatest investment traps, comparing how we performed against others. As they say, comparison is the thief of joy, and greed and fear of always sits front and centre. We feel frustrated with the should of/could of. "Had I moved my money to 'The Fund Formally Known as Growth', I would have made and additional 1% damnit!"
While we in "the business" may smile at this, the honest truth is that we often perpetuate these often random and misleading rankings. If we rank in the top decile, we milk such rankings through our PR and social media. If we fall in the bottom quartile, we justify why our rankings were low relative to our peers. When all along, we ALL know that we'd never chose any investment on how well it HAD performed over 12 months, but we play the agents game and let others perpetuate this great con.
Given a choice, WE ALL WOULD LOVE MORE. But wanting more is more a question of wealth management than pension immunisation. If we remember why the superannuation levy was introduced, it was to lessen the burden of future generations. While admittedly social security is funded individually, the demographic time bomb, coupled with the high health care inflation, places some of this fiscal burden on future generations (eg, our children). Pension management, on the other hand, is about immunising our future retirement outlays by our accumulated savings. It is for this reason why we express long term targets of CPI+, rather than a pension fund obtaining top quartile results. The latter is an agency risk (eg selling our fund), not a principal one (achieving long term results of CPI+). Annual return rankings is a game we all play, however flawed and unwarranted.
Of course it is true to understand how the fund's performance matches it's intended long term objectives. But here again, I've never seen a "Balanced Fund" described as "one which beats its competitors". It's objectives are expressed through risk and return metrics such as CPI+, down side risk of "?%", and negative returns of one in seven years. Yet while any actuary will understand such logic, we belittle members by feeding them misleading ONE year rankings, giving next to no observation as to how much risk was employed to deliver such risk. A fund with a greater exposure towards risky assets SHOULD outperform one with a more defensive exposure, no? But does this mean that the more defensive fund deserves a less appealing ranking solely on this? What happens when markets turn negative? Is the "underperformer" then considered a "performer"?
It is true that many of these tables do present five and ten year returns. Yet oddly enough, these returns are rarely ranked (as with the ONE year figures). All things being equal, at least ten year numbers would hold one to two market cycles; so would be more indicative of how the fund performed during risk on/off periods. Even here, however, any five/ten rankings are still inconsistent with how balanced funds are principally marketed; through risk metrics (eg maximum down side risk, or negative return of one in seven years).
Sadly there is no ONE ideal formulae in ranking super funds; each has their own level of potential misrepresentation. Our goal, however, shouldn't be to avoid rankings, but to disclose one which is closer to how pension savings are forced on to employees in the first place; through risk metrics. Divide five to ten year returns into two groupings: those which delivered their own CPI+ target, and those which didn't. Then rank these five and ten year returns on both returns AND subsequently on Sharpe Ratio's (matching a unit of risk underpinning the level of returns).
A colleague of mine once said that super market apples aren't priced on Sharpe Ratio's, nor for that matter on league tables of course. But pension/superannuation objectives are (inasmuch as their intended risk/return target). Defined Benefit (DB) funds are not rated purely on rankings, but on how much the fund sits in deficit/surplus. If Keith Ambachtsheer is right when he says that at the end of the day it's someone's pension, then we should rank our Defined Contribution (DC) schemes on more realistic risk/return metrics over this ridiculously short term beauty parade. If we as investment professionals don't stand up against this marketing agent's game, who else will?
