A “significant number ” of Australian super funds have failed a Chant West performance test ahead of the prudential regulator’s much anticipated results of an appraisal system that weed out the bad performers.

Adjusting for a 10-year investment period, the results found that 33 per cent, or 27, of the 82 MySuper funds that are currently available on the market had failed Chant West’s “reasonable-performance standard.” Of those that performed badly, nine also failed the fees test.

“It’s a high number,” said Chant West’s head of research Ian Fryer. “It’s an indication of what the APRA heatmap might show in terms of the number of funds that may be identified by the regulator as underperforming.”

Deputy chair of the Australian Prudential Regulation Authority Helen Rowell said earlier this month that they were ready to remove trustees of under-performing funds thanks to their heatmap system that uses a graduating colour scheme to measure how a fund is faring across performance, fees and costs and member’s outcomes. APRA’s results are expected early next month.

Chant West, which focused on the net investment performance, set the pass mark to be above or within 40 basis points of the return generated by a reference portfolio that has a similar level of risk to each MySuper fund. Fryer said while there was a “significant number” of both retail and industry funds that had failed the test, most of the retail products “didn’t do all that well.”

He also flagged that the longest equity rally in history had favoured super funds with a higher weighting in growth assets compared to those with a more defensive investment strategy.

“It’s been a bull market for the past 10 year so those funds that took a conservative position has not paid off,” he said. “But if over the next two years the market struggles and active managers and value comes back in vogue, we would expect that (headline) number to be lower.”

As for administration fees, Fryer said the “vast majority” of retail MySuper funds had failed what they believed was a “reasonable” amount to charge a member. Out of the 82 funds overall, 18 were found to be charging more than the 0.6 per cent per annum fee level that Chant West set as a maximum on a $50,000 balance. The report found that smaller industry funds also failed the test.

Fryer said retail funds backed by banks had more scope to cut fees, but there was a limit to what some of the smaller players could do which made their future more “challenged.”

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