13 MySuper products fail YFYS performance test

Thirteen MySuper products have failed the Australian Prudential Regulation Authority (APRA) performance test as part of the Government’s Your Future, Your Super (YFYS) reforms, but an association urges consumers to treat the results with extreme caution.

APRA assessed 76 MySuper products with at least five years of performance history against the objective benchmark.

APRA executive board member, Margaret Cole, said: “It is welcome news that more than 84% of products passed the performance test, however APRA remains concerned about those members in products that failed.

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“Trustees of the 13 products that failed the test now face an important choice: they can urgently make the improvements needed to ensure they pass next year’s test or start planning to transfer their members to a fund that can deliver better outcomes for them.

“APRA has intensified its supervision of trustees with products that failed the test and has requested they provide a report identifying the causes of their underperformance and how they plan to address them. Trustees have to monitor their products closely and report important information to APRA – including relating to the movement of members and outflow of funds.”

However, the Association of Superannuation Funds of Australia (ASFA) warned that some of the funds called out by the test were in fact good products that had delivered “excellent” returns to members over a long period of time.

It urged consumers to treat the benchmark results with “extreme caution”.

ASFA chief executive, Dr Martin Fahy, said: "This is a retrospective, relative performance assessment where the so-called underperforming products are compared against top performing products. Any product that falls 0.5% below the median is labelled as failing.

“What the published test results don’t tell members is why, and by how much, their fund has failed the test.”

ASFA noted the results were potentially confusing as some products with high average returns over 7% failed the test while other products with different asset allocations that also returned 7% had passed.

"This is the tyranny of benchmarks. They fail to take account of risk, lifecycle, or environmental, social and governance (ESG) screening considerations and instead they preference hugging the index,” he said.

"Among these so-called ‘underperformers’ we have products which have doubled people’s investments over the past decade. The irony is that the financial performance of these so-called ‘underperforming’ products would be in the top quartile in many OECD countries.

"No one test is perfect but this one ranks products on only one measure, when there are other important factors to consider, such as appropriate levels of risk for different age groups, the insurance coverage implications and whether you align with a fund’s investment ethos on issues such as climate change.

"We have long said that habitually underperforming funds should undertake an orderly exit and consumers should be protected during that process. But this test doesn’t do that. Instead, it sets an arbitrary bright line and removes from the process any role for judgment by our regulators.”

Trustees of failed products were required to write to members by 27 September, 2021, advising them of their performance test outcome and providing the details of the Australian Taxation Office’s YourSuper comparison tool.

Source: APRA

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Of course ASFA would say what it has. AFSA had plenty of time to develop its own quality assurance benchmarks, but did the usual thing that super organisations have done - turned a blind eye and more.

It's the government and APRA that should be marked as a fail in this. Not only is this test flawed it has and is likely to continue to be gamed by poor funds that have reduced admin fees just enough and only to fall over the pass line. and it will be otherwise good funds and their members that lose out.

Fact Checker - Why would you apply a retrospective pricing benchmark to a contemporary performance benchmark?

Has anyone considered the herding effect in investment manager asset allocation this creates when you are targeting not being less than 0.5% of median benchmark with a massive pool of default money?

Price discovery? EMH?

There's gonna be some interesting PhD papers kicking around in 10+ years time about this.

Very savvy thought there, I reckon you're right.

The whole thing is a farce created by people who don't know their arse from their elbow - much like almost all of the financial regulation of the last decade.

How do you get underperformance in a wrap account where investment return for their life stages ranges from 8.3% for 1940's to >25% for anyone 1970's and later! I am no lover of BT but I can't stand incompetent muppet regulators operating beyond the scope of their capabilities for comprehension.

What was the sharpe ratio of these funds? Does APRA know what a sharpe ratio is? What was the asset allocation, what is the investment philosophy? What alpha or beta risk was taken? Domestic/global, unlisted vs listed, currency impacts etc. Shares a long term investment but we'll assess funds on a short timeframe where 80-90% of the portfolio risk is equity risk.....What?????

I am not warranting that all these fund are great, that is not the point. The point is a single dimensional useless metric that is going to encourage benchmark hugging and all funds will be managed to business risk first as that is the motivation the regulators force onto the industry.

The absolute depth of the colossal stupidity of APRA, ASIC, treasury and gov't is beyond my comprehension or that of any sane person that has even the most rudimentary understanding of financial markets, portfolio construction, asset allocation and prudent investment decision making.

Totally agree with your comments. How is there any value in comparing MySuper options of various funds unless they have equal, or at least a similar, level of risk? how can you compare a lifestage option to a single strategy option? doesn't make any sense and is not providing any meaningful means of comparison.

All this is going to do is push all funds to allocate 100% to growth assets in their 'My Super Balanced' option so they can keep up with the funds that are already doing that....Hostplus, Aust Super etc.

Personally I think it's time to shift default super to the Future Fund, managed by an independant board/trustee. That way the 80% of the population who don't worry about super until they're 60 will get a reasonable return that isn't funding the profits of any corporations or propping up the labour party. The people who do take an interest and want to have more control over their money can go with an SMSF or a wholesale platform through an Adviser.

No smoke and mirrors then, no dodgy unlisted valuations and no vested interests.

its all part of the long term agenda, to have very narrow investment mandates, limited choice, maybe 10-15 funds, and to exclude advisers from investment advice on super - because any recommendation outside the benchmarks will lead ultimately to at least one year or two being under benchmark, in which event the client, or the regulator will pounce and say you can't manage money, hand it over to an industry fund or scaled multi-manager.

I agree 100%. Most sensible solution I have seen... ever.

They have taken "risk" into account by assessing the funds against a listed benchmark based on their SAA. This won't push funds to be 100% growth because that won't help them. It is going to cause people to go indexed because there is a 50bps margin of underperformance of the benchmark before you fail. Or it's going to cause funds to lie about their SAAs. Many funds reissued the SAAs they disclose to APRA as a result of this.

I honestly don't understand why so many people suggest the Future Fund, it's had decent performance but mainly as a result of being funded right before the GFC and most of the money was sitting in cash ready to be invested when the markets tanked. It also has tons of unlisted assets that it values only once a year which makes it look like it has lower standard deviation. That's fine for the Future Fund at the moment because it doesn't have to pay money out to anyone. There's no issue of equity to the owners because they have 1 client that isn't drawing down or putting more money in. They have no experience managing money for default members who would be coming and in and out and contributing money constantly. It would have to be a completely different investment strategy if they had members.

How convenient that the retail funds don't have the investment option in question listed just the whole fund/product, but many of the industry funds on the other hand do??

Two input world.

Fees and returns from a short time period. Take this and extrapolate over a 40 year period.

Little, if any consideration to anything else.

Well done the person above talking about Sharpe ratios.

Good luck verifying returns of unlisted assets....

Ugly stuff.

Where is the EMH and what happens to price discovery?

All this will do is bump up herding effects and arguably make market cycles more volatile. Everybody in, everybody out.... Left foot, right foot, everyone shifts their balance the same way at the same time to the same inputs.

Wasn't this effect proven on the London Millennium Bridge? Wobbly stuff.

Lol at the industry fund movement.
They have disassociated themselves with LUCRF and Maritime super.
How embarssing for them, they used to have 15 member funds on their website, and now only have 13 with LUCRF and Maritime the notable omissions.
These guys would eat their own if it were in their best interests.

But The retail fund’s union the FSC is happy to continue taking to support and spruk for BT and CSF which have both been called out as having dud funds. What does this say about its integrity?

Yep, good point, but what it does mean is that they aren't trying to hide history.
They will continue to support their members rather than throw them to the wolves.

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