APRA's heatmap – how to use it

In December 2019, the Australian Prudential Regulation Authority (APRA) launched its MySuper Product Heatmap. This heatmap is an important step in helping advisers and clients compare MySuper products.

investment APRA

Heatmap highlights:

  • Investment performance: compares investment returns after adjusting for asset allocation. This allows for an ‘apples with apples’ comparison when selecting different funds for your clients.
  • Fees: emphasises the fee burden clients can face. While investment returns may not be persistent, fees will be, and this should be an important consideration.
  • Sustainability: this acts as a flag for potentially higher fees or disruptive fund closures that clients could face. A client allocation to a fund with weaker sustainability outcomes increases the possibility of higher future fees or fund closure if the fund is unsustainable and cannot attract new clients.

While these features are useful for advisers, other factors may make changing a client’s fund not in their best interests. These factors include:

  • any tax implications of switching
  • client insurance arrangements
  • grandfathered pension arrangements.

What’s the best way to use APRA’s MySuper Product Heatmap?

The heatmap can be accessed by downloading the Excel file APRA MySuper Product Heatmap Excel file from APRA. We suggest the best approach for advisers is to use this heatmap to develop a short list of funds for your client’s risk profile based on the ‘best’ net excess returns during the past five years and the total fee load clients face. We also advise checking the sustainability ratios when making a recommendation to avoid potential problems in the future. We acknowledge that past performance is not predictive of future performance, however, we believe the additional insights discussed below will help in narrowing down a shortlist of candidates. Your practice’s Approved Product List will also serve as a source of potential options.

Understanding the returns APRA provides

Arguably, one of the biggest benefits of the heatmap is giving advisers a quick way to compare different funds with a similar asset allocation. APRA has suggested their view on how different investments should be classified as either growth, defensive or some combination of the two. This, we believe, helps give some consistent guidance on how different MySuper options compare on a like-for-like basis. This is particularly important for unlisted assets which have historically been an area of controversy in terms of how ‘defensive’ these exposures actually are.

The APRA guidance is given in the below table and is used to inform their calculation of a given fund’s benchmark. This table shows how APRA has approached classifying a fund’s asset allocation with different exposures altering the mix of growth and defensive assets. APRA calculates these benchmarks using a series of total return indices, such as the S&P/ASX 300 Accumulation Index with assumed fees. In addition, in order to adjust for the features of liquid alternatives these are treated as half growth, half defensive. This reflects that this asset class tends not to be as highly correlated to the share market and, on average, has less severe losses of capital when the market declines.

Growth/Defensive classification

Strategic Asset Allocation (SAA) Asset Class Classification
Equity, Listed Property, Listed Infrastructure 100% Growth
Unlisted Property, Unlisted Infrastructure 75% Growth, 25% Defensive
Commodities, Other 50% Growth, 50% Defensive
Fixed Interest, Cash 100% Defensive

Source: Table 4, page 14, Information Paper – Heatmap – MySuper Products

If your Strategic Asset Allocation (SAA) recommends a +/- 15% allocation to growth or defensive assets it’s straightforward to filter by the ‘strategic growth asset allocation’ column for funds within this range, 50% growth, +/- 15%, to provide you with a shortlist. The example below shows how the shortlist provides a broad range of funds but only a small number outperform a passive benchmark during this period.

Example of filtering the heatmap to show funds which meet SAA objectives

MySuper product name Single strategy /
Lifecycle indicator
Strategic growth
asset allocation
5 year Net
Return (NIR) p.a.
5 year NIR
relative to
Reference Portfolio p.a.
QSuper Lifetime   52% 8.97% 2.24%
QSuper Lifetime   52% 8.62% 1.86%
First Super MySuper Single strategy 61% 8.68% 1.62%
QSuper Lifetime   45% 7.98% 1.61%
QSuper Lifetime   39% 7.31% 1.34%
PSSap MySuper Balanced Single strategy 62% 8.02% 0.89%
Macquarie Group MySuper Single strategy 54% 7.57% 0.85%
First State Super MySuper Lifecycle   51% 7.12% 0.46%
Aon MySuper   63% 6.77% 0.35%

Source: APRA MySuper Product Heatmap, Excel file

Using the Net Investment Return

The Net Investment Return (NIR) is the return on the portfolio after investment-related fees and taxes. Importantly the NIR relative to the Simple Reference Portfolio controls for asset allocation over each quarter, as well as manager selection skill, so it more accurately reflects how the portfolio would have performed against a passive benchmark. If the fund’s managers had skill in active tilting or in manager selection to generate returns above the benchmark, then these should show up over time. The Data Insights paper which accompanies the heatmap illustrates this.

How does the heatmap incorporate fees?

APRA discloses fees on a total and on an administration basis. It’s another important facet helping guide advisers. High administrative fees can drag on the overall returns that clients will experience and may also point to high fixed costs being an issue. While high fees may be justified in terms of overall performance, it’s important that advisers are aware of fees so they can attempt to reduce overall client fees.

Administration fees have a larger impact on smaller account balances and when they’re in excess of 1.4% per year for a $10,000 account balance they tend to result in ‘significant underperformance’ according to the latest Data Insights – MySuper Product Heatmap

What sustainability metrics does the heatmap use?

APRA’s heatmap attempts to measure fund sustainability, which is how well the fund is performing in terms of asset and member growth, by measuring the following:

  • Adjusted Total Accounts Growth Rate – this reflects the net growth rate in the number of accounts for a super fund. The logic being that more accounts means a lower average fixed cost.
  • Net Cash Flow Ratio – this reflects how the total asset base of a super fund has been growing.
  • Net Rollover Ratio – this reflects active member or employer decisions to rollover from an existing fund into this fund.

In an ideal world when an adviser is selecting a fund for their client, they would want to choose one which scored positively on each of these metrics. This is because positive sustainability scores point to a fund being attractive enough to survive long enough to match or exceed a client’s investment time horizon. In addition, it can flag a warning of higher future fees for clients if a fund is losing members because the fixed costs will be divided between an ever-shrinking number of members.

What are some of the pitfalls of the heatmap?

  • The five-year timeframe used in the heatmap reflects the limited life of MySuper products, but five years may not be long enough to properly test a super fund’s performance and its ability for this performance to persist.
  • The lack of risk measures, such as volatility or peak-to-trough drawdowns, can mean different outcomes for clients even if two funds have the same five-year total returns. A fund with lower net returns may be preferable to a client if it allows, or is expected to allow, them to attain positive investment returns with lower volatility. The APRA approach does arguably address this by adjusting for the average allocation to growth assets so that excess returns are in line with the average risk, in terms of exposure to growth assets, being taken over time.

If you would like more information about APRA’s heatmap, please contact your IOOF representative.