(Alert observers would note that this actual risk/return outcome for Australian superannuation funds runs counter to that expected from finance theory, which ‘classical’ postulates an upward sloping trade-off’. This actual outcome is completely ‘risk-reward consistent with portfolio theory, in that there is a positive risk/return trade-off between Investment Risk and Returns, with higher levels of Investment Risk being rewarded with higher levels of investment return. This risk/return trade-off is postulated to also apply in respect of Portfolio Risk in the application of portfolio theory, which ignores ‘classical’ Manager Skill - and as noted above Manage Skill constitutes approximately 25% of a normal Australian superannuation Total Investment Risk. In the real world this fund’s postulated relationship is not the case. Note also that this has significant implications for analysis and ‘efficient frontier’ implications that are beyond the scope of this submission.) ‘portfolio optimisation’ – I would point out that the proposals to use an of fund returns as a ‘efficient frontier’ measure of fund performance (as set out on pages 117 - 118 of the Draft Report) is almost certainly very deeply flawed. Some may wish to assert that the risk/return result in Figure 14 represents a ‘special Figure 15, shows the risk/return relationship for US Foundations over the 10 years case’. to December 2015. The actual risk/return trade-off is the same as in Figure 14. Figure 15 Source: Cambridge Associates Efficiency Costs The costs to superannuation fund investors and society of the distortions to superannuation fund investment arising the misguided policies and regulations – principally relating to investment management fees - currently applied to superannuation funds is high. Based on superannuation actual investment returns over the 10-year period to June funds’ 2013, a reduction in allocations to active Manager Skill by 20% (say from 25% to 20% of Total Investment Risk), would be expected to have a net cost (after fees ) of 0.5% per
(Alert observers would note that this actual risk/return outcome for Australian superannuation funds runs counter to that expected from ‘classical’ finance theory, which postulates an upward sloping ‘risk-reward trade-off’. This actual outcome is completely consistent with portfolio theory, in that there is a positive risk/return trade-off between Investment Risk and Returns, with higher levels of Investment Risk being rewarded with higher levels of investment return. This risk/return trade-off is postulated to also apply in respect of Portfolio Risk in the ‘classical’ application of portfolio theory, which ignores Manager Skill - and as noted above Manage Skill constitutes approximately 25% of a normal Australian superannuation fund’s Total Investment Risk. In the real world this postulated relationship is not the case. Note also that this has significant implications for ‘efficient frontier’ analysis and ‘portfolio optimisation’ – implications that are beyond the scope of this submission.) I would point out that the proposals to use an ‘efficient frontier’ of fund returns as a measure of fund performance (as set out on pages 117 - 118 of the Draft Report) is almost certainly very deeply flawed. Some may wish to assert that the risk/return result in Figure 14 represents a ‘special case’. Figure 15, shows the risk/return relationship for US Foundations over the 10 years to December 2015. The actual risk/return trade-off is the same as in Figure 14. Figure 15 Source: Cambridge Associates Efficiency Costs The costs to superannuation fund investors and society of the distortions to superannuation fund investment arising the misguided policies and regulations – principally relating to investment management fees - currently applied to superannuation funds is high. Based on superannuation funds’ actual investment returns over the 10-year period to June 2013, a reduction in allocations to active Manager Skill by 20% (say from 25% to 20% of Total Investment Risk), would be expected to have a net cost (after fees ) of 0.5% per
subdr070-superannuation-competitiveness-efficiency.docx