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‘Strong case’ to hit pause on choice performance test: Chant West


The performance test as it stands isn’t “fit for purpose” when it comes to choice products. And its bright line nature means tweaks are needed for MySuper products too.

While the MySuper performance test dispatched a mere 13 funds, the outcomes for choice products could be even worse, according to analysis from ratings house Chant West. But the current performance test is not “fit for purpose” and there’s a “strong case” for Treasury to hit pause before it’s applied to choice products.

“It’s not about the benchmarks; it’s about having one number over one period to determine whether a fund passes or fails,” says Ian Fryer, general manager at Chant West. “In MySuper, where the variation of options is more narrow, that’s sort of reasonable.”

“There’s real issues with the MySuper performance test, but when you look at choice, where there’s a much wider range of investments, it just becomes much harder. Choice options are trying to achieve a much wider range of objectives, and saying “We’re going to have one way of measuring every choice product” is going to be ill-suited to many of those… We can’t think that measuring every option in the market is going to be valid with just one way of measuring it.”

Socially responsible options, real return portfolios and conservative portfolios with low duration/defensive alternatives are “ill-suited” to assessment using the standard benchmarks. A performance test for choice products should include a range of different metrics, Fryer says, including the current performance test applied over five, seven, and eight-year periods; risk-adjusted returns over various periods; and an administration fees metric (among potential others). That would tell “a much more well-rounded story” about how an option has performed.

While that wouldn’t create a bright line result that could be easily communicated to members, APRA could then assess the outcomes of options that have still missed on a majority of those metrics; for example, hearing the case of an SRI option for which the benchmarks against which it’s measured simply aren’t relevant.

It would need to be a “pretty high bar”, Fryer says, and Treasury should clearly outline the parameters of APRA’s review “to provide it with the necessary powers to conduct its review role with appropriate clarity and authority”. If a fund has just performed poorly or has high fees, it should fail the test and be required to issue letters to members.

“There needs to be clear reasons,” Fryer says. “There’s a governance process that needs to be worked out there.”

Another complication of applying the current performance test to choice is that some funds will have options that pass and others that fail even though they’re guided by the same investment process. Conservative and high growth options will be more likely to fail the test; options in the middle of the risk spectrum are less likely to fail. That might only compound the confusion of members, who will receive a letter saying some of their options have failed while other passed, “even though it’s the same team managing the money.”

In MySuper world, the performance test is still producing one number that doesn’t tell the whole story; failing to measure the main driver of performance, asset allocation, while not factoring in positive changes that funds might have made to their investment models over the eight years to enhance member investment outcomes and future performance. Still, Chant West anticipates “very few funds that passed the test last year will fall foul of the test this year.”

“While the legislated benchmarks are appropriate for many funds, they’re not appropriate for some funds as they don’t account for subtle but important differences in how funds invest,” the Chant West report says. “These differences include the wide range of alternative assets used by funds, ESG issues, lower fixed interest duration and various downside protection mechanisms.”

“Some funds failed the first performance test because of poor performance or high fees but others failed because their investment strategy didn’t align well with the structure of the test. Despite all this, we expect it’s too late to change the nature of the MySuper performance test and that it needs to run its course, at least for this year, perhaps with some tweaks to benchmarks.”

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