Some members are excited for retirement, while others approach it with a “real sense of shame and fear”. Funds are going to have to figure out how to cater to both groups or risk failing them all.
If there’s one lesson for investors from the past five years, it’s that chopping and changing their strategy – even in the face of massive market turmoil – doesn’t always pay.
CEM finds the value in YFYS
While questions have been raised about the ability of the YFYS performance test to accurately identify poor-performing funds, an analysis of historical global pension fund data by CEM Benchmarking (headed up by CEO Rashay Jethalal, photo at top) has found that the test effectively weeds out poorer performing investors and increases system-wide returns.
“The (YFYS) package marked one of the largest shake-ups to Australia’s superannuation system in decades and it was designed to address a number of structural issues with the existing system by affording greater protection to superannuation account holders,” the report says.
“Our research has found that YFYS test, over the long term, is likely to contribute to improvement in system-wide performance… However, just like any test that could be used, it is not perfect, and there are ways it can be improved.”
CEM found that an average of about 14 per cent of funds in its global database failed the seven-year YFYS test in any one year, with the proportion falling to 12 per cent over eight-year performance timeframes. The study also revealed that almost 80 per cent of funds that failed a seven-year test were likely to miss the cut over the following 12-month period. But CEM’s answer to whether the YFYS test actually improves outcomes is a “resounding yes.”
Removing investors that failed consecutive seven-year and eight-year tests from the universe increases net value added “marginally” – 0.30 per cent to 0.30 per cent – but the efficacy of the test improves with time. Removing investors that fail consecutive tests would have improved future net value added across the remaining funds by 0.08 per cent over the past decade (2011-2020), equivalent to an additional A$2.7 billion of additional assets.
Closer to home, CEM anticipates that the next round of testing will dispatch 10 funds from 13 –
not driven by better performance, but because the test will be stretched to eight years – and that eight will have previously failed. CEM’s analysis found that larger funds with more internal active management tend to outperform those that are smaller, more outsourced, and more passively managed.
But larger funds also suffered significant periods of underperformance in the years following the Global Financial Crisis, with the average size of investors failing the test two years jumping from “small” to “average scale investors” and then spiking in 2016 to capture investors with 50 per cent more AUM than average.
“The data appears as it does because a handful of very large investors suffered staggering losses during the U.S. real estate crash of 2008, which led in turn to large, negative 8-year net value adds that persisted into 2016 (unlisted real estate returns tend to lag public markets by a year, and so for many investors, their worst recorded down year was 2009 and not 2008),” the report says. “The lesson here is that while scale can be an advantage, it is not a silver bullet.”
