SMSFundamentals: Regulation Impacts On Super Fund Strategies

SMSFundamentals | Apr 07 2022

Super funds may consider new investment alternatives in a bid to outperform an annual performance test.

-Super funds are being held to account for underperformance 
-Impact on performance of benchmark-beating strategies
-Public versus private market allocation 
-The limitations of passive investing

By Mark Woodruff

A reform for Your Future, Your Super (YFYS) was introduced in July 2021 by the government requiring an annual performance test for MySuper products.

The assessment under the performance test, in conjunction with the Australian Taxation Office YourSuper comparison tool, is intended to hold registrable superannuation entity licensees to account for underperformance through greater transparency and increased consequences. 

As a result, super funds will be aiming to outperform a YFYS benchmark, notes JP Morgan Asset Management (JPMAM) and may now consider specific investment alternatives to improve chances of passing the relatively new test.

To determine if the test could result in a more conservative investment approach and impact long-term returns, JPMAM (via NMG Consulting) conducted a survey of heads of investment strategy, asset consultants and super fund Chief Investment Officers (CIO).

Survey results

The survey showed CIOs are likely to become more cautious with high alpha strategies (stock-picking), and preferences for asset allocation within public markets may swing toward more benchmark-relative strategies. It’s thought a high degree of focus on fees will continue, due to the after-fee focus of the performance test

Also, there may be greater investment in private markets where there’s an opportunity to add value beyond the YFYS performance test. Positions within private markets may gravitate to niche sectors deemed as “satellite” relative to the strategy’s respective benchmark.

As summarised by Andrew Creber, A&NZ Chief Executive Officer at JPMAM, those surveyed indicated greater willingness to take higher risk positions in alternatives than in the public market. 

The asset manager suggests super funds adopt managed benchmark-aware strategies in public equity and fixed income markets, in combination with an allocation to niche private market debt and equities.

While passive investing is economical and achieves reasonable risk diversification, it also limits an investor’s ability to deliver returns beyond the benchmark, points out Mr Creber.

Note that YFYS benchmarks do not apply to Self-Managed Super Funds.

However, industry participants suggest the new rules may be a stepping stone towards closer scrutiny of SMSF performance as well.

SuperConcepts' executive technical manager Phil La Greca, speaking to SMSFAdviser, suggested "These performance tests generate valuable data that essentially state what is regarded as good investment performance for a superannuation fund. If an SMSF has trouble performing at these known levels, it will become difficult for advisers to justify a recommendation for an SMSF to be established. 

“This could also mean that significant underperformance by an SMSF could require an adviser, operating in accordance with best interest duty, to recommend the winding up of an existing SMSF.”

Yet at this stage, SMSF performance is measured very differently to MySuper fund performance. In order to apply the same benchmarks, the ATO would need to establish new accounting procedures, in line with MySuper fund procedures, so that comparative assessments can be made.

In other words, it won't happen tomorrow. 

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