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.
Performance gap narrows, but more competition coming
Your Future Your Super (YFYS) was the impetus for Brighter Super to uplift its investment ecosystem, according to its CEO Kate Farrar, and the fund is scrutinising its service providers to ensure operational resilience.
Formed by a merger between Energy Super and LGIAsuper, and having snapped up Suncorp’s superannuation business along the way, Brighter Super now has 250,000 odd member accounts with roughly $31.5 billion under management – bringing it just in line with the size that APRA continues “sustainable”.
“It’s really good to have made it,” Brighter Super CEO Kate Farrar told the SMSF Association National Conference on Wednesday. “We’ve done two mergers in the last couple of years which have brought our size up, but we’ve also worked extremely hard on our capabilities. In particular with relation to advisers – the Suncorp business came with a wonderful collection of advised members, so we now have 27 per cent of our membership advised, largely independently.”
The fund has significantly uplifted its ability to support independent financial advisers, which will “continue into the future”, and done “a “huge amount of work” on its investments ecosystem, partly as a result of the YFYS performance test.
“YFYS is quite a technical piece of legislation; it has more formulas in the appendices than a maths book. But it has definitely made us better at investment and investment monitoring, and I think we see that in our performance.”
The Quality of Advice Review (QAR) will fundamentally transform the APRA-regulated sector, Farrar says, while operational resilience is a “huge piece of work”.
“APRA are wanting us to look not just at our third parties, but even to our fourth parties to make sure that they are cyber-resilient, to make sure they are able to get back up and running from a business continuity perspective and to make sure you know what you’re going to do if that happens,” Farrar said. “Those are huge pieces of preparedness when you consider all the critical operations across the fund.”
Meanwhile, fund performance is narrowing as a result of YFYS even as competition for new and switching members heats up, according to Linda Elkins, KMPG national sector leader for asset and wealth management.
“We’ve seen a really significant increase in competition. I’m sure when you’re watching television, playing with TikTok or Instagram – whatever you do – I’m sure you’re getting served (ads) at much higher rates then historically was the case because with the previous default arrangements it wasn’t as necessary for funds to compete for acquisition and retention of members,” Elkins said.
The other “really important” legislative changes are the Retirement Income Covenant, with funds now expected to fine-tune the retirement phase of the superannuation lifecycle, and the QAR, which will give them more tools to do it.
“It’s certainly true that APRA-regulated funds have a very, very small proportion of actual retired members,” Elkins said. “And historically that member’s just not staying with them and they’re not offered the products and services expected at that phase.
“The QAR… is likely to cause very significant shifts in the role super funds can play in the provision of advice. And when you put competition in retirement and advice together, I think what funds hope will be the outcome is far greater retention and whole of life services to their members.”
