Standard Risk Measure already throwing up anomalies

From

The Standard Risk Measure adopted by superannuation funds to help investors assess investment risk may already be misleading them, according to van Eyk Head of Strategic Research Jonathan Ramsay. 

Mr Ramsay warned that, while he supported the concept of a standard measure of risk, the current version was already producing anomalies because it allowed funds wide discretion in what methodology they used to calculate it. 

The SRM was adopted for all new super fund product disclosure statements issued after June 2012. It requires super funds to state the likely number of negative annual returns a fund will experience in 20 years.

“We have already found examples where equities funds have been given similar risk measures to bond funds, despite the vastly different risk profile of these asset classes, simply because different funds are using different methodologies to calculate the SRM,” Mr Ramsay said. 

In another example, fund provider A gave an SRM for its bond fund of 3-4, while fund provider B gave its bond fund an SRM of 1-2, despite both funds having similar benchmarks and performance objectives. 

“Any rational consumer looking at the SRM would choose the product being promoted by Fund B, even though they are both very similar funds,” Mr Ramsay said. “The only difference is the way the SRM has been calculated.”

The SRM allows funds to deviate from a standard methodology as long as they explain and justify their reasons for doing so. 

But Mr Ramsay warned this could defeat the very purpose of a Standard Risk Measure. 

“It introduces complexity that has the potential to confuse many retails investors, if indeed they bother to go beyond the headline SRM when reading the PDS,” he said. 

Mr Ramsay said if consumers could be trusted to interpret detailed and often complicated nutritional information on food packaging there was no reason they could not benefit from a slightly more detailed standard measurement of investment risk. 

He proposed a new SRM that not only took into account the risk of negative returns but also showed how far the value of an investment was likely to fall during a drawdown and how many years it was expected to take to recover. This would be of particular value to those investors nearing retirement. 

Funds should also be required to publish historical figures for these measurements where available, as well as their own estimates, so they could be judged on those estimates. 

“While this may seem like a lot of information to some, it’s less than you would find on the back of a packet of chips,” Mr Ramsay said.

You must be logged in to post or view comments.