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.
Funds in the red, black or pink: it depends
The final individual fund numbers when confirmed later this month will also show that several funds which had taken more defensive stances with their balanced options will have better comparative performance.
This will underscore the flaws in the current YFYS performance test for MySuper (balanced) options, which have been roundly criticised since their design by Treasury and implementation by APRA. If Treasury and APRA had gone ahead with the new test on trustee-directed options too, postponed last week to allow a rethink (see separate report this edition), it would have exacerbated the problem for funds and members.
As it is likely to unfold, for instance, two funds which failed the MySuper test last year, Australian Catholic Superannuation (ACS) and Christian Super, are thought to have shown strong outperformance this year because of their more-defensive strategies. Both were all-but forced into mergers as a result of last year’s test.
The $10.5 billion ACS is to merge with Unisuper and the $2 billion Christian Super with the Australian Ethical super fund.
Another thing which becomes apparent is that because of the way the test is constructed, it is almost impossible for a fund to recover enough ground to pass the test the year following a failure. The earlier seven-year numbers are also included in the latest year.
The latest above-average performances for both ACS and Christian Super are also likely to be better than the annual performance from both their merger partners in the final calculations.
The final numbers are usually published by both SuperRatings and main rival Chant West at the end of the third week of each month after the month in question, with year-end numbers for June taking a day or two longer because of unlisted asset valuations.
But with last week’s early publication (July 4) of an estimated minus 2.7 per cent for the year by AustralianSuper, other funds are also being pressured to release their estimates.
While this is not unusual, it should be understood that some funds’ estimates will be rougher than others. Funds have a little flexibility, for instance, in when and how they provide revaluations of their private markets assets. Certain derivatives products are also open to slight variations due to timing of calculations.
Putting it crudely, funds can push some of their projected losses into the next year for reporting purposes, in the same way that businesses, or even government departments, can optimise their tax positions by bringing forward or pushing back invoices.
The fact that most funds will be hovering in a range of very small negatives this year does place greater importance on the revaluations, however, especially in the eyes of members.
Hostplus Super and Qantas Super are thought likely to retain their top positions as the number one and two performers respectively in the year to June, with Hostplus possibly the only public offer fund in the major surveys with a positive annual return.
Kirby Rappell, SuperRatings executive director, said last week (July 7) that, on the 30-year anniversary of the introduction of the Superannuation Guarantee, super had brought significant benefits to Australians with $1 invested in 1992 currently worth $7.67.
Rappell said: “Funds have had a challenging second half of the financial year, dragging on a solid first half. This was the fifth negative return for balanced options we have seen since the introduction of super 30 years ago; however, it follows the second-highest annual return of 17.8 per cent in 2021. So, when you look at it over the last two years, members’ balances are up.
“Superannuation is a long-term investment and funds continue to provide strong long-term returns on average and have outperformed the typical CPI+3.0 per cent investment objective. When you consider that share markets are down around 10-12 per cent across Australia and globally, super funds have done well to prevent some of the steep falls that we have seen from being passed through to members’ super account balances.”
