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 returns flash red – but it’s not all bad news
Up until the end of May, returns for the financial year to date “were pretty flat”. But by close-of-business Friday (June 17) a median growth fund would have returned negative five per cent – and given the large daily fluctuations we’re now seeing, the final result could be “meaningfully different”, says Chant West senior investment research manager Mano Mohankumar.
It’ll be the first negative return many members have seen, and will represent only the fifth negative return since the introduction of compulsory super in 1992. The average loss in the Covid market downturn was -0.6 per cent, though many funds successfully struggled to get their members something in the green.
While the expectation is usually that growth options will be punished the most, conservative the least, the indiscriminate nature of the sell-off – which has touched everything from bonds to growthy tech stocks – means the differential won’t be that great, with Mohankumar estimating about one per cent difference.
But it’s not all bad news. Most funds continue to meet their long-term return objectives by a significant amount, with the median growth fund returning seven per cent per annum compared to an annual CPI increase over the same period of 2.5 per cent. Still, any dislocation in equity market raises the possibility that previously disengaged members will start making bad decisions.
Last week, a panel of CIOs convened at the AIST’s superannuation investment conference warned that funds would need to go “back to basics” to communicate the downturn to members in order to prevent the sort of switching that went on at the bottom of the Covid market.
“I think it’s important that members see things in context,” Mohankumar said. “This return comes on the back of a median growth return of 18 per cent last year, and that’s the second highest single-year return since the introduction of compulsory super in 1992… But even factoring in the large losses in June so far, the median growth fund is still five per cent ahead of the pre-Covid high at the end of January 2020.”
“More importantly, funds continue to meet their long-term return objectives by some way. We’d just caution members about the perils of attempting to time the market; that whole plan of switching to cash and switching back later is going to result in an inferior outcome… Getting distracted
While Chant West hasn’t calculated the YFYS benchmarks for each investment option, Mohankumar says it will be “interesting to see how active management has done this month.” But on that front, new research from research house Super Ratings for the year to 31 March forecasts that some 20 per cent of Choice options will fail the performance test, with options comprised of 91-100 per cent growth assets most likely to fail based on performance over the past eight years.
Around a quarter of “stable” options comprised of 20-40 per cent growth assets are also expected to fail, with more MySuper products also set to underperform by more than the 50 basis point leeway.
“The first performance test has had a significant impact on the future of those products which failed,” the research house wrote. “Having an industry wide benchmark gives funds a clear target with significant potential benefit for members, however ensuring the test is appropriately capturing the nuances of the range of investment options in the industry remains a challenge.”
