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.
Super funds shouldn’t hold back on data
The Superannuation Data Transformation program launched in 2019 aims to standardise the flow of information between APRA and the industry it regulates. It’s a framework across fees and costs, asset allocation, expenses and insurances and most of the other financial pieces. APRA instituted it for several purposes: to provide data for heatmaps and performance tests, conduct industry supervision, and report it back to the funds themselves.
But Matthew McKenzie (pictured), of superannuation regtech Nuj notes that many funds have “availed themselves” of APRA’s ‘best endeavours’ concession in their reporting – meaning that, being unable to provide the precise detail in APRA’s preferred manner, they made their best endeavours to do so. But in giving less information, they’re going to get less.
“There is value in us having a more transparent flow of information,” McKenzie says. “There is definitely value in getting that (data) turned around and analysed against every other fund and presented back to the funds because that’s how things are going to improve.”
“You can’t look at yourself in isolation and say “Hey, this is how we do it in isolation – how can we make improvements?” – you can in a general sense, but if there’s free flow of information to and from APRA that you can slice and dive it gives you more room to take action and improve.”
Expenses has been the biggest sticking point, McKenzie notes; it’s “definitely a sensitive topic that’s been getting a lot of heat”, and no fund wants to reveal granular detail about how much it’s spending and what it’s spending it on. But both APRA and Treasury are looking for further improvements in expenses transparency, and APRA is about to begin further consultations with the industry following the rollout of its Expense Reporting Standard last year.
“There’s definitely lots of reporting from the funds,” McKenzie says. “I’m not bagging the funds. But because APRA said they could use best endeavours, they reported less and less. And when you get less information, less information can be turned around and reported back to the industry.”
Nuj has “always been a massive supporter of the free flow of information” and McKenzie says that funds being able to improve their decisions off the back of it “should also set them apart”, enabling members to have a better connection with their fund and their retirement goals.
“It’s clarity; it’s transparency in itself,” McKenzie says. “This is focused on getting comparable information back to the funds and the Nuj’s so that we can analyse this and look at expenses and ask where they’re sitting against their industry peers. If you don’t have comparisons how can you make change? You can’t look at AussieSuper’s marketing expense and it’s a single number and make any judgement if you’re comparing it to First Super’s marketing expense.”
You need to ask how you’re looking and what best practice is. You can only get to that position when information flows back and forth… They will benefit from it; they’ll have more transparent information; they’ll be able to take action and that’s what the whole regulatory framework is about.”
