ECON940: Analysis of Australian Superannuation Funds - Report

This report presents a quantitative study on Australian superannuation funds, analyzing the impact of licensee ownership, profit status, investment expense ratios, and regulatory classifications on market returns. The study employs a cross-sectional analysis of 168 funds, examining one-year, three-year, and five-year returns. Key findings include the identification of public sector funds as leaders in the last twelve months, financial sector funds as top performers over three years (2015-2017), and the highest risk observed in the 2017 market returns. The analysis also delves into licensee ownership type returns, highlighting the performance of financial, employer, public sector, nominating, and other sector funds across different time periods. The report includes descriptive and inferential statistical analyses, hypothesis testing, and concludes with implications for investment strategies and fund management, based on the observed trends and relationships between various factors and market returns.

Superannuation Funds – A Quantitative Study on Australian Market
A Comparative Analysis of
Superannuation Funds of Australia
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Superannuation Funds – A Quantitative Study on Australian Market
Executive summary
Rationale: In the present article, one year, three year, and five year returns of market
funds for superannuation investment were analyzed to discover the impact factors
(licensee ownership, licensee profit status, investment expense ratio, and regulatory
classification of the funds) and their possible effects on the market returns.
Methodology: The investigation was primarily based on the quantitative methodology
with cross sectional analysis of the 168 superannuation funds. The market returns were
collected and a secondary data set was used for the purpose.
Results: Maximum return was observed for three year time period of average return. Five
year returns were found to be comparatively low, whereas last twelve months average
return contained high amount of risk. Scrutiny of the returns for last twelve months yielded
public sector funds as the clear leader, whereas last three year returns from 2015 to 2017
found financial sector funds as the leading return generator. Highest risk was observed in
market returns in last twelve months of 2017, and the lowest volatility was observed in
case of last five years annualized return (2013- 2017).
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Superannuation Funds – A Quantitative Study on Australian Market
Table of Contents
Executive summary.....................................................................................................................................2
Superannuation Funds – A Quantitative Study on Australian Market.........................................................4
Business Quandary......................................................................................................................................4
Statistical Problem.......................................................................................................................................6
Character of Research Data.....................................................................................................................6
Design......................................................................................................................................................6
Hypotheses..............................................................................................................................................6
Statistical Analysis.......................................................................................................................................7
Descriptive Findings.................................................................................................................................7
A. Year Wise Returns........................................................................................................................7
B. Licensee Owner Type Returns...................................................................................................11
C. Market Return Based on Type of Funds.....................................................................................16
Market Returns on Licensee Profit Status.........................................................................................20
Inferential Analysis................................................................................................................................22
Hypothesis Testing - I.........................................................................................................................22
Hypothesis Testing - II........................................................................................................................23
Hypothesis Testing - III.......................................................................................................................24
Hypothesis Testing - IV......................................................................................................................26
Conclusion.................................................................................................................................................27
Implication.................................................................................................................................................27
References.................................................................................................................................................29
Appendix...................................................................................................................................................32
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Superannuation Funds – A Quantitative Study on Australian Market
Superannuation Funds – A Quantitative Study on Australian Market
The difficulty in investment post retirement is a well identified grey area of any share
market. Several pension funds around the world with active management serve to solve
the problem. The superannuation pension funds are an important part of the share market
in Australia. The funds are designed to satisfy basic retirements of the pensioners by
simplifying the economic process. Moreover, financial gain from pension has redoubled
considerably in each country, with obligatory pension contributions. This benchmark
system has additionally managed to supervise massive amounts of savings within the
economy. But the problem of proper stock selection in the superannuation funds still exists,
and the present article proposes to investigate the return pattern of the different
superannuation funds with expense ratio incurred due to fund management.
Business Quandary
The dilemma in investing money in superannuation funds is primarily due to the volatility
in market returns and expense ratio for investment. The current scenario of Australian
social security ensures pensioners of the retirement benefits, thus generating a huge
amount of idle money. The doubt about investing the financial gains from employer’s
contribution and government’s benefit schemes always makes the pensioners
apprehensive. Hence, performance of the pension funds depends especially on the type of
stocks where the money is invested and the expense ratio incurred. The issue has also
become a matter of national importance, as country’s financial market benefits from the
investment of this huge money. However, the empirical proof of pension fund performance
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Superannuation Funds – A Quantitative Study on Australian Market
remains restricted. The literatures on the continuity of the superannuation funds’
performance have indicated that the concern entirely depends on fund managers. Price
behavior, inflation rate, certain external factors have the benchmarks for adoption of asset
allocation approach. A comparable study was conducted within the Australian context by
Edmonds, Holle, & Hartanti in 2015, where the tax system of the country was found to be a
hindrance in offshore investment. The economic importance and perpetually ever-
changing dynamics of retirement need a stronger understanding of the fund's performance
(Hallahan, Faff, & Benson, 2008). This is often why it's doable to revise the newer
literatures (Cummings, 2016; Donald, & Le Mire, 2016). The aim of this text was to look at
the enquiry on the performance of the Australian superannuation funds from 2013 to 2017.
The analysis focus was totally on the investigation of market returns in 2017, 2015-2017,
and 5 yearly returns in the time period of 2013-2017. The breakdown of the analysis was
targeted on four necessary aspects. The impacts of licensee possession standing of the
funds, profit motive of the licensee, restrictive classification of superannuation funds were
evaluated. Most significantly, expense ratios of the funds were compared for the two
licensee profit standing teams.
Statistical Problem
Character of Research Data
The present study obtained a historic dataset on superannuation funds with market
returns of 168 funds for three time periods (Beckford, 2016). Thirteen variables, both
categorical and numerical were present to describe the market returns of the funds.
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Superannuation Funds – A Quantitative Study on Australian Market
Specifically, the information set consisted of six categorical, and seven continuous
variables. The dependent variable was considered as market return with three levels,
return for the financial year of 2017, 3 years in the time period of 2015-2017, and 5 years
return in a time period of 2013-2017. Licensee possession kind (LICOWNER), restrictive
classification by APRA (REGULA), variety of funds (Type), and licensee profit standing
(OBJECTIVE) were the four categorical independent variables (Berenson, Levine, Szabat, &
Krehbiel, 2012).
Design
A comparative analysis was designed to scrutinize the internal and important impact
factors for the market returns of the funds (Hillier, 2012). The study was based on
investigation of the effects of the categorical factors such as licensee ownership status, type
of funds, objective of the licensee, and operating expense ratio were noted for the market
returns in three different time period.
Hypotheses
The statistical problem was framed as a set of hypotheses in the present article. The
statistical significance of the effect of independent and categorical effects on the market
return of the retirement funds was assessed in the inferential analysis. The researcher
framed the following hypotheses based on the available information.
I. Profit motive of the licensee yielded more market returns (for three levels of
returns) compared to no profit motive licensee.
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Superannuation Funds – A Quantitative Study on Australian Market
II. Funds with no profit motives has lower investment expense ratio compared to that
of the funds with profit motives of the licensee.
III. Market returns (for three levels of returns) were significantly dependent on the
different type of fund.
IV. Funds with classification of public offer yield low market returns compared to the
funds with no classification of public offer, by APRA.
Statistical Analysis
Descriptive Findings
A. Year Wise Returns
Table 1
Returns for Five Licensee Ownership Type
LIC Ownner Type
MEAN SD SKEWNESS MEAN SD SKEWNESS MEAN SD SKEWNESS
FINANCIAL 6.33% 2.70% -0.826 7.05% 2.49% -1.085 3.00% 1.40% -2.474
EMPLOYER 9.34% 1.40% -0.436 9.12% 0.94% -0.325 4.11% 0.86% -0.432
NOMINATING 9.77% 1.65% -0.712 9.35% 1.09% -0.919 4.27% 0.74% -0.883
PUBLIC SECTOR 1.69% 24.49% -3.307 9.37% 1.13% -0.803 4.53% 0.75% -0.337
OTHER 8.76% 3.02% -1.700 8.47% 2.29% -2.393 4.04% 0.74% -0.919
One Year Interest Three Year Interest Five Year Interest
Descriptive for Interest Rates of Five LIC Owners
Note: Returns for 2017, 2015-2017, and 2013-2017 are provided
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Superannuation Funds – A Quantitative Study on Australian Market
I. Average market returns of the funds for three time periods were investigated. Market
returns in the financial year 2017 for public sector funds was the worst (M = 1.69%, SD
= 24.49%) with huge volatility. The returns for licensee type of nominating funds (M =
9.77%, SD = 1.65%) and employer funds (M = 9.34%, SD = 1.40%) were the two top
performers with low market risk. Returns from public sector funds also noted to have
high negative skewness indicating presence of few low return funds in 2017 (Levine,
Stephen, Krehbiel, and Berenson, 2005).
Figure 1: Side-by-Side Box Plot for the Twelve Month Return in 2017
II. Three year annualized returns of 2015 – 2017 for the nominating funds (M = 9.35%, SD
= 1.09%), public sector funds (M = 9.37%, SD = 1.13%), and employer licensee funds
(M = 9.12%, SD = 0.94%) were found to be the top three performers. Whereas,
financial sector fund was observed to be the average performed fund (M = 7.05%, SD =
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Superannuation Funds – A Quantitative Study on Australian Market
0.94%). Average return from other sectors (M = 8.47%, SD =2.29%) was also excellent,
but with high negative skewness (Nelson, 2014).
Figure 2: Side-by-Side Box Plot for the Three Year Returns
III. Interestingly, average returns for five year period of 2013 – 2017 were observed to
have huge market correction effects. The top performer was the public sector fund (M
= 4.53%, SD = 0.75%), followed by nominating licensee fund (M = 4.27%, SD = 0.74%)
and employer funds (M = 411%, SD = 0.86%). Financial funds maintained conservative
returns in five year term also, and was significantly negatively skewed with few low
return funds.
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Superannuation Funds – A Quantitative Study on Australian Market
Figure 3: Side-by-Side Box Plot for the Five Year Returns
B. Licensee Owner Type Returns
I. Average market returns of financial funds was the best in 2015-2017 period (M=
7.05%, SD = 2.49%), followed by 2017 returns (M = 6.33%, SD = 2.7%). Five year
average return was the lowest (M = 3.0%, SD = 1.4%), and importantly volatility of the
fund was also comparatively lower than other two periods. Some of the financial funds
were observed to provide low returns and due to which the distribution was
significantly negatively skewed. The comparative analysis has been presented in Figure
4 side-by-side box plot. If opted for, only long term investment was advisable for this
fund.
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Superannuation Funds – A Quantitative Study on Australian Market
Figure 4: Side-by-Side Box Plot for Returns from Financial Sector Funds
II. Returns in employer licensee funds in last twelve months of 2017 (M = 9.34%, SD =
1.39%) was excellent, followed by the last three years (M = 9.12%, SD = 0.94%) market
returns. Due to market probable market corrections, average return for employer
licensee funds reduced to 4.11% with a risk of 0.86%. From the side-by-side box plot in
Figure 5, it was clearly evident that five year average returns were comparatively very
low.
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Superannuation Funds – A Quantitative Study on Australian Market
Figure 5: Side-by-Side Box Plot of Returns for Employer Sector Funds
III. For public sector funds, the average return for three year period (M = 9.37%, SD =
1.13%) was outstanding, followed by five year average return (M = 4.53%, SD =
0.75%). However, the twelve month return for 2017 was the lowest (M = 1.69%, SD =
24.49%). The fund was not at all advisable in short time period of investment, due its
high amount of risk associated with it. But, long term investment could have an option.
The returns were significantly negatively skewed for twelve months period in 2017.
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