Michael Drew, like many finance professors, played sport at school. One year he won two coveted cricketing trophies at the end-of-season awards: best and fairest player, and batsman with the highest average-run score. But these achievements did not reveal the full story about Drew’s sporting prowess.
“We never won a game and my batting average was 23 runs,” says Drew, who works at Griffith University in South Brisbane. The awards decorated him as the best player in a losing side: his performances only shone against the weaker play of his teammates.
Drew, of course, was never a cricketer. As a finance professor he uses sport as a metaphor to explain how the framing of a question can mask reality. In this case, the young, fake Drew shows us how superannuation funds that rank highly on investment performance tables when markets fall can claim similar honours: they beat their peers but can still fail in their absolute goal of preserving and growing members’ money. “It’s like being awarded the best-and-fairest medal in which your club won the wooden spoon,” says Drew. In down markets, superior peer-relative performance is cold comfort.
Super funds and the financial media take the monthly and quarterly investment-return tables published by ratings companies SuperRatings and Chant West very seriously. They aren’t alone. Fund members also want to know how their fund ranks. The tables tap into our love of competition by intimating that returns are everything. Outpacing inflation, the stated aim of many funds, relents to the primacy given to quarterly returns. Failure is not losing money but falling from the top quartile of performance tables. “Peer risk translates the definition of risk from an absolute to a relative,” says David Neal, chief investment officer at the $73-billion Future Fund.
In all aspects of life, Australians seem hooked on competitive rankings. “We’ve got ‘My School’, ‘My Hospital’ and ‘My University’ websites,” Drew says over a ham and salad sandwich at an outdoor table at Griffith’s student refectory in Nathan. “We’ve got this problem: league tables abound.”
Rankings, which make funds fearful of slipping behind their peers, compel them to invest in similar ways. Captive to so-called peer risk, funds move as a herd.
Peer-risk reasons “Herding sounds bad,” says Justin Wood, a finance academic and former chief executive of Barclays Global Investors in Australia. “Like a bunch of sheep walking off a cliff at the same time.” He prefers to say that funds “succumb to peer risk – it’s less pejorative”.