Selecting Australian equity superannuation funds: A retail investor's perspective

In this performance persistence study, two questions are addressed. First, what is the relationship between past fund returns and future performance? Secondly, does a ’hot hand‘ fund selection system deliver economically significant returns to investors? Using a sample of Australian equity superannuation funds over the 1990s, the answers from this study are as follows: on a raw and risk-adjusted return basis the authors find evidence of mean reversion, with prior annual performance having little influence on future fund return. Selecting funds based on a persistence strategy resulted in underperformance of industry and passive returns for the retail superannuation investor over the sample period. The findings of the study have serious implications for financial planning advisers who market superannuation funds based on past performance. The results suggest that previous annual performance has little influence on future returns.     

Attribution of investment performance: an analysis of Australian pooled superannuation funds*

This paper evaluates the market timing and security selection capabilities of Australian pooled superannuation funds over the eight‐year period from January 1991 to December 1998. Evaluation of both components of investment performance is surprisingly scarce in the Australian literature despite active investment managers engaging in both market timing and security selection. The paper also evaluates performance for the three largest asset classes within diversified superannuation funds and their contribution to overall portfolio return. The importance of an accurately specified market portfolio proxy in the measurement of investment performance is demonstrated. This paper employs performance benchmarks that account for the multi‐sector investment decisions of active investment managers in a manner that is consistent with their unique investment strategy. Consistent with U.S. literature, the empirical results indicate that Australian pooled superannuation funds do not exhibit significantly positive security selection or market timing skill.     

Attribution of investment performance: an analysis of Australian pooled superannuation funds*

This paper evaluates the market timing and security selection capabilities of Australian pooled superannuation funds over the eight‐year period from January 1991 to December 1998. Evaluation of both components of investment performance is surprisingly scarce in the Australian literature despite active investment managers engaging in both market timing and security selection. The paper also evaluates performance for the three largest asset classes within diversified superannuation funds and their contribution to overall portfolio return. The importance of an accurately specified market portfolio proxy in the measurement of investment performance is demonstrated. This paper employs performance benchmarks that account for the multi‐sector investment decisions of active investment managers in a manner that is consistent with their unique investment strategy. Consistent with U.S. literature, the empirical results indicate that Australian pooled superannuation funds do not exhibit significantly positive security selection or market timing skill.     

Effect of fund size on the performance of Australian superannuation funds

This study examines the relationship between fund size and performance for two major superannuation industry sectors in Australia: retail and not‐for‐profit, using a unique but confidential database. Results suggest that members benefit from being invested in larger superannuation funds for three reasons: (i) larger not‐for‐profit funds provide diversification benefits of investing in more asset classes including unlisted property and private equity, (ii) larger funds in both sectors avoid the scale diseconomies in investment returns documented in studies of equity mutual funds and (iii) larger funds make substantial savings by spreading fixed operating costs (such as IT infrastructure) over a larger asset base.     

Disclosure of liquidity and cash flow statements by Australian superannuation funds before Covid-19

The Commonwealth's stimulus package required the unexpected distribution of cash by superannuation funds to members during the Covid-19 pandemic. We focus on disclosure and maintenance of an operational risk financial reserve and reporting of the statement of cash flows in annual reports by Australian superannuation funds. These disclosures represent mandated sources of information providing evidence of liquidity levels for meeting cash payouts and disclosure adherence. Many funds did not meet their statutory reporting requirements. More members and higher union board membership as measures of stakeholder power explain higher disclosure in support of managerial stakeholder theory.     

Cost efficiency in Australian non-bank financial institutions: A non-parametric approach

A two-stage procedure is employed to evaluate non-bank financial institution cost efficiency. In the first stage, data envelopment analysis is used to calculate technical, allocative and cost efficiency indices using a sample of 200 Australian credit unions. The results indicate that a typical credit union's costs in 1997 were 30 per cent above what could be considered efficient on the basis of observed best practice. The major source of overall cost inefficiency would appear to be allocative inefficiency, rather than technical inefficiency. The second stage uses limited dependent variable regression techniques to relate credit union efficiency scores to financial statement information. The results indicate that commercial lending activities, expenditures on information technology and marketing and promotion, the proportion of non-interest income, and association membership are a significant influence on the level of cost efficiency. The results are found to be invariant to alternative model specifications where input prices are first assumed to be different for each credit union and then assumed to be identical across the sample.     

Performance persistence in hedge funds: Australian evidence

Using the most comprehensive database on Australian hedge funds, we test the performance persistence for the period July 2000 to June 2005. We employ both parametric and nonparametric approaches to identify persistence. We report evidence of short-term persistence and no evidence of long-term winning persistence. Tests of multiperiod performance reveal weak evidence of losing persistence. We also do not find any evidence of persistence in both stock picking and market timing. We report evidence of mean reversion for both stock picking and market timing at the medium horizon.     

In‐house asset management in the Australian superannuation industry

We examine how executives from the Australian superannuation industry perceive and approach the choice between managing assets in‐house, versus outsourcing to external investment managers. We find that decision frameworks, as well as the perceived benefits and challenges of in‐house management, can be described in terms of four elements: costs, capabilities, alignment and governance. Industry participants address these four elements in diverse ways. This is reflected in a variety of decision approaches, aspects that are considered and emphasised in decision‐making, and implementation structures.     

International equity funds,performance, and investor flows: Australian evidence

This is the first paper in the Australian literature to examine the investment performance of actively managed international equity funds (domiciled in Australia). Both institutional and retail international equity funds are assessed together with the impacts of investor fund flows on portfolio returns. Performance is also evaluated using conditional measures that account for public information in the global economy, however, despite an improvement in the measurement of risk-adjusted returns, performance remains consistent with an efficient global market. These findings support prior research, which concludes that active management does not provide investors with superior returns to passive indices. When consideration is given to the liquidity service provided by active managers, fund flows are shown to negatively impact on performance.     

Bank modelling methodologies: A comparative non-parametric analysis of efficiency in the Japanese banking sector

This study examines the efficiency of the Japanese banking system utilising the slacks-based measure. In addition, we also extend the comparative bank modelling methodology literature by utilising both the intermediation and production approaches, together with the profit/revenue-based approach, proposed in [Berger, A.N., Mester, L.J., 2003. Explaining the dramatic changes in performance of US banks: technological change, deregulation, and dynamic changes in competition. J. Financial Intermed. 12, 57–95]. We find that, across the three methodologies, there are marked differences in: mean efficiency scores; the dispersion of efficiency scores; and the ranking of banks and bank sectors. Hence, the results demonstrate a very high degree of modelling dependence, which has importance in the context of policy responses.     

Sovereign pension and social security reserve funds: A portfolio analysis

Sovereign wealth funds (SWFs) have been increasing in numbers and in the global reach of their investment activities. At the same time, they seem to experience the adverse consequences of the financial crisis differently than other financial intermediaries. This paper assesses whether and how a retirement-financing purpose has affected their investment strategies since the global financial crisis, as opposed to the strategies of other public pension entities that do not operate as SWFs. We construct a sample of 12 sovereign pension reserve funds (SPRFs) and social security reserve funds (SSRFs) and analyze the effects of size, operational model, country development, the fund's experience, and quality of disclosures on strategic asset allocation for the period 2007–2014. We also investigate the relevance of “home bias.” Our results show that SPRFs invest more aggressively than SSRFs, but are less exposed to domestic investments. We do not find major shifts in asset allocation induced by the financial crisis, except for a recent decrease of home-country exposures.     

The investment behavior of buyout funds: Theory and evidence

We analyze the determinants of buyout funds’ investment decisions. We argue that when there is imperfect competition for private equity funds, the timing of funds’ investment decisions, their risk-taking behavior, and their subsequent returns depend on changes in the demand for private equity, conditions in the credit market, and fund managers’ ability to influence perceptions of their talent. We investigate these hypotheses using a proprietary dataset of 207 U.S. buyout funds that invested in 1,957 buyout targets over a 30-year period. Our dataset contains precisely dated cash inflows and outflows in every portfolio company, links every buyout target to an identifiable buyout fund, and is free from reporting and survivor biases. Thus, we are able to characterize every buyout fund's precise investment choices. Our findings are as follows. First, established funds accelerate their investment flows and earn higher returns when investment opportunities improve, competition for deal flow eases, and credit market conditions loosen. Second, the investment behavior of first-time funds is less sensitive to market conditions. Third, younger funds invest in riskier buyouts, in an effort to establish a track record. Finally, following periods of good performance, funds become more conservative, and this effect is stronger for first-time funds.     

Unconditional return disturbances: A non-parametric simulation approach

Simulation methods are extensively used in Asset Pricing and Risk Management. The most popular of these simulation approaches, the Monte Carlo, requires model selection and parameter estimation. In addition, these approaches can be extremely computer intensive. Historical simulation has been proposed as a non-parametric alternative to Monte Carlo. This approach is limited to the historical data available.In this paper, we propose an alternative historical simulation approach. Given a historical set of data, we define a set of standardized disturbances and we generate alternative price paths by perturbing the first two moments of the original path or by reshuffling the disturbances. This approach is either totally non-parametric when constant volatility is assumed; or semi-parametric in presence of GARCH(1, 1) volatility. Without a loss in accuracy, it is shown to be much more powerful in terms of computer efficiency than the Monte Carlo approach. It is also extremely simple to implement and can be an effective tool for the valuation of financial assets.We apply this approach to simulate pay off values of options on the S&P 500 stock index for the period 1982–2003. To verify that this technique works, the common back-testing approach was used. The estimated values are insignificantly different from the actual S&P 500 options payoff values for the observed period.     

Persistence and the four‐factor model in the Australian funds market: a note

We investigate whether Australian fund managers are able to deliver persistent performance using Carhart’s (1997) four‐factor model. Short‐ and long‐term persistence is examined and the sample is also divided into unit trusts and superannuation funds. We do not find evidence of persistence in any sample of funds. We find that winner (loser) funds tend to hold past winner (loser) stocks. Winner and loser unit trusts both appear to have positive exposure to small stocks.     

Optimal allocation to hedge funds: an empirical analysis

What percentage of their portfolio should investors allocate to hedge funds? The only available answers to the above question are set in a static mean-variance framework, with no explicit accounting for uncertainty on the active manager's ability to generate abnormal return, and usually generate unreasonably high allocations to hedge funds. In this paper, we apply the model introduced in Cvitanic et al (2002b Working Paper USC) for optimal investment strategies in the presence of uncertain abnormal returns to a database of hedge funds. We find that the presence of the model risk significantly decreases an investor's optimal allocation to hedge funds. Another finding of this paper is that low beta hedge funds may serve as natural substitutes for a significant portion of investor risk-free asset holdings.     

Do hedge funds deliver alpha? A Bayesian and bootstrap analysis

Using a robust bootstrap procedure, we find that top hedge fund performance cannot be explained by luck, and hedge fund performance persists at annual horizons. Moreover, we show that Bayesian measures, which help overcome the short-sample problem inherent in hedge fund returns, lead to superior performance predictability. Sorting on Bayesian alphas, relative to OLS alphas, yields a 5.5% per year increase in the alpha of the spread between the top and bottom hedge fund deciles. Our results are robust and relevant to investors as they are neither confined to small funds, nor driven by incubation bias, backfill bias, or serial correlation.     

The holdings markup behavior of mutual funds: evidence from an emerging market

This paper uncovers a seasonal mutual fund holdings markup pattern in Taiwan’s market. Specifically, we find that fund’s equity holdings jump up significantly at the quarter-ends and year-end while drop back immediately to the previous level in the following month. While the holdings markup pattern found in this paper may look similar to the price markup phenomenon found by Carhart et al. (J Finance 57:661–693, 2002), the mechanism used by fund managers in the performance inflation may be quite different. In specific, while Carhart et al. (J Finance 57:661–693, 2002) document that fund managers use the stocks currently held in their portfolio to mark up the fund performance, we find that fund managers in fact use both the stocks already held in their portfolio and the new stocks to mark up their holdings. Furthermore, Carhart et al. (J Finance 57:661–693, 2002) do not explicitly examine if there exists a holdings markup in addition to the price markup. In this study, we fill this gap by directly exploring the holdings markup behavior by the fund managers. We also identify the specific stock characteristics that fund managers prefer in their holdings markup. In specific, fund managers prefer to trade growth stocks, stocks with larger market capitalization, higher institutional ownership, higher quality of earnings, and stocks in the high-tech industry, to inflate the fund performance. We also find that fund managers tend to avoid stocks that are herded by other funds.     

Central bank behavior: A positive empirical analysis

The central bank is analyzed as a utility-maximizing unit acting in the framework of a politico- economic model. It derives utility from keeping the price level stable and is constrained by government, the structure of the economy, and the political commitment to stable exchange rates. It uses a satisficing strategy, concentrating on keeping conflicts with government below a certain level. In the case of serious conflict, the central bank follows the policy directions undertaken by government but with a time lag. The complete model comprising endogenous consumer/voters, government and central bank is econometrically tested for Germany, with good results.     

Loss coverage and stress testing mortgage portfolios: A non-parametric approach

This paper outlines the development of a practical approach to simulating a credit loss distribution function and to implementing a stress test exercise focusing on the entire Spanish mortgage portfolio. Specifically, we determine, via regression model, the main factors that explain why households fail to meet their mortgage payment commitments. This allows us to assign individual borrowers’ PDs and to estimate a rating system for the mortgage portfolio. Then, we simulate the empirical distribution function of mortgage loss rates using a Monte-Carlo resampling method, and compare the loss rates from this function with those provided by the Basel II IRB formulas. Finally, we assess, by running a stress exercise, the ability of banks to withstand certain adverse situations. The main result from this exercise is that, in general terms, Basel II IRB regulatory loss coverage offers fairly adequate protection for banks.     

A stochastic dominance analysis of the turnover related performance of mutual funds

Mutual fund performance relative to portfolio turnover is examined for funds in different investment categories using non-parametric, stochastic dominance criteria. We find that, in general, high-turnover funds are at least equally preferable to those with low turnover. This suggests that the costs of obtaining and exploiting information are, on average, compensated for by the subsequent return distribution. The exception is maximum capital gains funds. Here, high-turnover funds clearly dominate those with low turnover and the information gathering function is profitable.We gratefully acknowledge the contribution of an anonymous referee and the comments of Art Gudikunst of Bryant College.