By Martyn Wild.
The club has a new DJ
On 1 July 2021, the superannuation landscape changed. The Treasury Laws Amendment (Your Future, Your Super) Act 2021 (the YFYS Act) came into effect with supporting regulations made on 5 August 2021. According to APRA;
"The YFYS reforms will require the superannuation industry to improve its efficiency, transparency and accountability."
Following the application of APRA's MySuper Performance Test to August 2021, 13 out of 80 MySuper funds failed that test. The upshot is that for RSE Licensees (RSEs) failing APRA's annual performance test, the end of the disco might be closer than they think.
If Everybody Looked the Same
Now that catastrophic commercial failure has become a very real possibility, for the vast majority, it will pay to blend into the crowd. Just pass the test and move on.
Unfortunately, the Performance Test as currently proposed will likely result in a notable minority trying their utmost to bust-a-groove and keep dancing. As such, with the regulatory focus now on the implementation of the Strategic Asset Allocation (SAA) (not the outcome), there's a very real chance of bifurcation in the MySuper industry.
As an aside, identifying the bad dancers from the good is perhaps somewhat arbitrary in this case, given that it is based upon testing as of right now. One wonders how the list would change if it were run one year ago or even, one year from now? Someone should probably do this exercise because if the list changes materially, that tells us a lot about the efficacy of the test. Anyways...
Figuring out your dance moves
Here's a non-exhaustive list of what we think might happen:
Survival Risk becomes the primary risk for RSEs; after all, they can't help members if they aren't in operation. They have to pass APRA's benchmark.
Mergers will continue apace - if you can't beat 'em, join 'em. What proportion of RSEs will seek mergers because they feel they have been set up to fail? Mega funds seem to be popular in certain circles these days but they are unlikely to be a panacea.
Active management becomes increasingly important as you go down the performance list. RSEs at risk of failing the Performance Test will use the tools at their disposal to maximum effect in an attempt to stay in business. For these RSEs, the temptation to utilise third-party active managers, derivatives and tactical asset allocation (TAA) will be too much to resist.
Peer risk becomes more important as you go up the performance list. As RSEs become more acutely focused on Survival Risk, their ordinal positioning will matter a lot for fund flows. For most groovers on the dance floor, the use of active management or esoteric investments will be seen as a commercial risk to be taken sparingly. That means that if passive investing wasn't king, it soon will be.
Expect lots of directional trading as funds tactically tilt away from their core SAA: the allure of positive portfolio returns will be just too appealing. But be warned, TAA is not easy and for many funds, the experiment will end badly. It makes us wonder if APRA will subsequently seek to limit fund deviations from benchmark weights?
The once-upon-a-time poster child of diversification, alternative assets, will be increasingly difficult to justify as a staple for multi-asset products. Indeed, this is happening already and several big MySuper funds have wound back or eliminated their programmes. Benchmark mismatches, liquidity challenges and short-term underperformance are characteristics of such investments. For many RSEs, YFYS now puts alternatives into the 'too hard basket'.
Operational efficiency is important. Maybe leverage becomes more popular as a way of gaining exposure? One thing is for sure, cost-cutting moves higher up the list of RSE priorities.
A solid governance framework will be essential - not just for all the reasons the regulator wants but because the investment teams will want to know, in advance, their scope for 'peer differentiation' and the penalties for failure.
Collaboration between MySuper funds will continue. If funds aren't large enough to attract the same scale benefits as their larger cousins, they may seek to jointly invest.
Party On
It's fair to assume that the YFYS reforms have the right intention and invariably, teething issues will emerge. So, let's park the hyperbole and try to stay productive here. You may or may not like the new playlist, but you're going to have to dance to it.
Let's remember also that Australia's superannuation system wasn't designed, it evolved. As such, it is replete with problems and inefficiencies that will take time to untangle. We shouldn't rely on league tables to identify serial offenders.
At MARQAM, we have designed a portfolio analytic system to analyse a superannuation fund's returns v YFYS benchmarks. Our cutting edge processes enable us to provide real-time consulting advice to help ensure that RSEs not only pass APRA’s test but do so in a way that allows their investment teams to remain faithful to their investment philosophy.
If this work would be of interest to you, please feel free to reach out to discuss it further.
*Lyrics from the Groove Armada track - 'If Everybody Looked The Same'. For those of you now hankering for some 90's dance music, click here!
For more information or to talk to a member of the MARQAM team, please click here.
MARQAM is a privately-owned, boutique consulting company focused on providing superior investment outcomes for clients and greater profitability for businesses. We are not affiliated with any other financial institution
Disclaimer: The information provided here is for interest purposes only and does not constitute investment advice or a recommendation of any kind.
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