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.
APRA fires latest salvo in super wars
A significant chunk of super fund advertising could now be on ice, with APRA finding that marketing expenditure could not be shown to have improved members’ financial position.
As stapling puts a nail in the coffin of default distribution, many of Australia’s biggest super funds have turned their attention to the dark art of advertising to gain and retain market share. But the issue has become increasingly vexed, with APRA’s recent expenditure review finding that big super doesn’t have a Don Draper-esque understanding of how advertising works – and can’t prove that it’s in the best financial interests of their members.
“APRA’s view is that, given the YFYS reforms, some instances of expenditure examined did not have sufficient evidence to demonstrate that the expenditure would be in the best financial interests of members,” APRA wrote in its report, released on Tuesday (26 October). “RSE (registrable superannuation entity) licensees should reflect on whether existing practices meet the higher standards demanded by the new duty.”
APRA found that there was a lack of “clear metrics to assess the benefits of market expenditure to (super fund) members” and an overreliance on high-level considerations such as changes in membership numbers “without demonstration of specific improved outcomes for members”. AustralianSuper has previously refused to disclose the details of its marketing expenditure on the basis that it would unfairly disadvantage the fund in a competitive marketplace, but attributed its substantial member growth between 2019 and 2020 to that campaign.
“The purpose should not only be in terms of broad observables, for example, increasing or maintaining membership or growing funds under management, but also in terms of how specifically the benefits of the marketing expenditure will be measured in terms of driving/delivering improved outcomes for members,” the report reads.
APRA noted incidents of RSE licensees entering into multi-year sports sponsorships without a business case considered by the board, and renewal of marketing campaigns without an understanding of their actual effect. In other cases directors and executives received tickets to sporting events as part of their sponsorship arrangements, despite there being “no evidence of any improved outcomes for members derived from these additional benefits.”
APRA embarked upon the expenditure review in 2020. At the time, Helen Rowell, APRA deputy chair, said “I think it’s fair to say that if we are going to find anything in our work, it’s that that analysis and evidence is probably not as robust as it needs to be.”
Of course, marketing expenditure could be in the best financial interests of members – but a lack of hard data means that super funds wouldn’t know either way. Still, it’s unlikely that the advertising campaigns run by Industry Super Australia – which have drawn the ire of figures like Tim Wilson and Andrew Bragg – will be discontinued until such a time as it can be shown that membership of industry groups is not in member’s best financial interests (though these arrangements are also now being scrutinised).
The conduct examined by APRA pre-dated the new best financial interest duty introduced in the Your Future Your Super reforms, and has in some cases ceased. However, the regulator has written to funds where expenditure has continued and is “challenging them to demonstrate how they have considered the impact of the best financial interest duty on expenditure decisions”.
The issue of marketing expenditure has gained prominence in recent weeks with scrutiny on the sponsorship deals of EISS Super, which had seen the fund partner with organisations linked to former executives and their family members.
