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.
Fewer losers as super funds manage to the YFYS performance test
The YFYS test claimed fewer scalps this time around, with only five products failing – four of which had already failed, including Australian Catholic Super’s LifetimeOne, EISS’ Balanced, BT Super MySuper and AMG Super. Westpac Group Plan MySuper was a first time failure.
“The fact that there were fewer failures suggests that industry has adapted to the test,” says David Bell, executive director of the Conexus Institute. “The question now is understanding whether there is a system cost of focusing on a performance test which doesn’t align perfectly with member outcomes. This will unlikely ever be empirically demonstrated but our anecdotal insights are that there is a system cost.”
“The YFYS is a crude test of performance implementation. Implementation is important but it has to be measured accurately. Further, the amount of market exposure adopted by funds and the choice of markets also have sizable impacts on outcomes.”
Bell notes that the outcomes were likely a consequence of managing to the parameters of the YFYS test and that there’s now a scenario where the test has few failures in the future. He believes that a “broader measure of performance aligns better with protecting member outcomes” and that the YFYS review will “capture these issues and reduce unintended consequences”.
Ian Fryer, general manager of ratings house Chant West, says that the performance test results show that “funds are very good at managing towards a benchmark like this”.
“They’re very successful at that objective, but it makes it difficult to balance that objective with the best long-term returns – which was their objective beforehand,” Fryer says. “In order to pass the test, they may have given up some of the long-term return.”
The reversal of some headwinds that dominated in the first seven years of the test has also contributed to more products passing, with those funds that had gone shorter duration in their fixed income allocations and those who allocated more to liquid alternatives (like hedge funds and absolute return funds) managing to avoid some of the punishment that others received during the sharp sell-off earlier this year.
“Those particular areas were headwinds for funds in the first seven years, but they turned into tailwinds in the last 12 months. I imagine that reversion would have helped a lot of funds make sure they passed, but funds have clearly also been managing to the benchmark – some of them heavily so, because they were close to failing. Some are just keeping a close eye on it.”
APRA’s superannuation czar Margaret Cole said that the results highlighted the “improved outcomes” that have been achieved for members over the last 12 months.
“Pleasingly, almost 96 per cent of MySuper superannuation members are now in a performing MySuper product, equating to 13.1 million member accounts,” Cole said. “Equally positive is that the performance test has contributed to over 5.1 million MySuper members (just over 38 per cent) now paying lower fees than they were last year.
“This is the culmination of APRA’s intensified supervisory approach, driving trustees to take meaningful action to improve member outcomes. APRA encourages superannuation trustees to continue to explore ways to improve the efficiency of their MySuper products.”
