Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
‘We know it’s not perfect’: The future of Your Future Your Super
Despite APRA’s move to name and shame 13 underperforming funds, it’s clear that Your Future Your Super (YFYS) is a work in progress. More needs to be done to make it a true and fair test.
Call them the Dirty (Baker’s) Dozen: 13 funds named and publicly shamed for their failure of the YFYS performance test, which has loomed over the industry since it was announced on Budget Night in 2020. Among their number are Maritime Super, which has heavily protested APRA’s assessment of its performance, LUCRF, and a host of retail and corporate products. The announcement brings to a close the first chapter in the YFYS story.
The question now is what will become of a test that could shape the superannuation industry for decades to come.
One primary modification that APRA (and doubtless, the industry) wants to make is ensuring that the YFYS performance test actually works, and key to that will be updating some of the indices that comprise its performance benchmarks. While the indices against which assets like unlisted infrastructure and private equity were initially measured were expanded after heavy industry pushback – research from the Conexus Institute found that funds might have to cut their unlisted allocations to 10 per cent to avoid failure – the new ones aren’t necessarily reflective of activity within the unlisted space and, due to vagaries of composition, aren’t always replicable for some of the funds benchmarked against them.
“On the unlisted assets – we know it’s not perfect,” Katrina Ellis, APRA general manager for superannuation, told the AIST’s Superannuation Investment conference on Wednesday (September 1). “And when we put out our heatmap we used listed indices because we couldn’t find a decent unlisted index…. That’s an area that we would really like to improve. We’re trying to use the best that’s available right now, but we also want to work with all participants in the industry to say, “How can we measure this better?” We realise it’s not perfect, but it’s going to be here as an annual thing so let’s continue to revise it.”.
While there are “flexibilities” within the legislation that would allow APRA to update the indices, a change to the regulations themselves – which would have to be done by Treasury – would be required to expand the number of indices used in the YFYS benchmarks.
One area where the industry would doubtless prefer more action is the release of the actual test results to individual funds and the public, with many noting that, given the vagaries of what underperforming YFYS actually means, a pass/fail mark doesn’t tell the whole story. Being able to see where a fund went wrong could have a profound impact on performance across the industry; recent analysis by Frontier found that a number of the 13 funds that failed the test actually delivered higher returns than some that “made the grade”, which they attribute to “a function of the investment strategy of each fund accepting different levels of risk to achieve its stated aims.” The binary “pass/fail” nature of the test also means that some funds are only just passing, while others “have missed out by very thin margins”.
“We fulfilled our obligation under the legislation, which is that we publish who passes and who fails,” Ellis said. “We didn’t want to make it confusing for consumers. We published pass/fail as we thought that was the most straightforward thing. This was the first time we’ve done it – we’re open to learning and open to improving and next year we’re going to have to do it not for 80 MySuper products but for maybe a 1000 Choice products, so we’re interested in how we’re going to run this again next year and what we could do differently.”
But there are other, more difficult questions beyond the test itself – questions APRA does not appear to have an answer for. What happens to the members of those Dirty (Baker’s) Dozen should they underperform again? While APRA has made ‘merge or die’ its mantra, Ellis seems unsure as to why a fund would consider merging with a serial underperformer when it has to think seriously about the best financial interests of its own members or else suffer the same fate. While Ellis said “there may be some funds that end up having no partner”, she doesn’t believe it’s likely, and APRA has requested detailed plans from the 13 underperformers that will deal with “what happens when everything goes wrong”.
“It will be very dependent on every situation and that is a complex matter,” Ellis said. “I think it is important for trustees of funds that have done assessments that their future may be limited is that they really look into what assets they have that may not be attractive to other trustees or some complexity they have that might not be attractive to other trustees and those will be difficult things to work through but the sooner the work starts the better.”
But as has been noted elsewhere in this publication, few funds just fall into a merger; it’s a long and difficult process, and one that doesn’t always succeed. See the failed tie-up between NGS and Australian Catholic Super. Those complexities will doubtless be amplified by the fact that a fund will be in member outflow and might not make an attractive merger partner in the first place.
Of course, discussions of all these problems tend to assume that there is the political will to solve them. While APRA says it wants to work co-operatively with the industry, the government is a different matter. The harsh ‘bright line’ YFYS test is a politically palatable solution to an admittedly overgrown industry, and one that is impossible to extricate from the partisan superannuation wars in which the Morrison Government participates. Abandoned pieces of the YFYS legislation – such as the investment veto power – point to the idea that a political goal is being achieved with YFYS, and one that the government is unlikely to abandon in the face of even the fiercest criticism of the industry.
