Failed YFYS funds need to be in ‘crisis mode’

Most of the 13 superannuation funds that failed the Your Future, Your Super (YFYS) performance test will not recover and they should be in “crisis mode”, according to a panel. 

Speaking at the Australian Institute of Superannuation Trustees (AIST) Superannuation Investment Conference, Parametric manager for research and strategy, Whitlam Zhang said looking back to the prudential regulator’s introduction of their super heatmaps, of the underperforming funds that were identified, 47 no longer existed.  

“It's not hard to imagine that Your Future, Your Super, probably will have a similar effect,” he said. 

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“For the underperforming funds, they don't really have the luxury of time. The Australian Prudential Regulation Authority (APRA) has given them until the end of the year to come up with their plans and so they'll need to make some pretty difficult decisions soon.  

“Crisis mode really means spending a lot of time figuring out what options they have between now and the end of the year. So, if they want to look at mergers, looking at what merger partners might make sense. 

“The regulator is expecting trustees to figure out what to include as part of their contingency plans but that comes at a cost because all the time that's now spent on responding to Your Future, Your Super could have been spent on actually running the fund.” 

Zhang said funds would be thinking about how to adapt their investment strategies to the YFYS environment, and how they thought about their risk budgets as the test penalised funds for taking active risk. 

He said funds looking to minimise the risk of failing the test would potentially aggressively dial down the amount of active risk in their fund and that would impact the level of future returns the funds could expect.  

Zhang said funds would also continue to look for opportunities to lower their fees but there were concerns about going too far.  

“Where does cost cutting actually result in the possible detriment of member outcomes? What if, for instance, a fund couldn't hire the staff they need to either implement their portfolios effectively, or deliver quality advice to their members. This is just something that we just got to be very careful about, so that we don't end up with a race to the bottom,” he said. 

Zhang noted that no funds was immune to the test and could become a deep rabbit hole that could consume huge amounts of time for already busy teams and would serve as a distraction.   

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This whole performance test is the most ridiculous, ill conceived idea the govt has ever come up with. How can you test performance against a benchmark retrospectively, when the funds may have done things differently had they known what the benchmark was going to be. Funds who have an older demographic have tried to do the right thing by their members by going with a more conservative asset allocation, now they're being penalised and will never be able to rectify those issues. How does ASIC/Govt expect funds to improve performance within 12 months? that's just impossible. The 13 funds that failed this year will fail next year as well and may as well close up shop. What a disaster.

not sure I agree... the performance test is based on asset allocation. All asset classes are linked to a benchmark, and underperformance by greater than 0.50% pa. is flagged as a fail. This is just the mysuper products (until choice products are included next year). Surely funds that cant beat an index (is it over 5 years?) dont deserve a mysuper licence! Agree with your last point... going to be hard to turn it around in 12 months...

Couldn't disagree more. Terrible policy as it stands and should not extend to choice products.

It is dangerous to potentially influence asset allocation through policy by requiring funds to hug a benchmark based on relatively short term performance metrics.

Remember, the price of wine does change, some investments take a long time to come to maturity compared to others and sometimes it is a good idea to buy umbrellas in summer.

Also, market inefficiencies can prevail for very extended periods.

Do policies like this result in an outcome where fund managers are forced to buy into things that they might not otherwise consider buying?

If this is true, then does this represent a new conflict? To whom does the duty apply?

Some might argue that this aligns the member objectives to the fund managers objectives and holds them to account.
I largely disagree because when you hold managers to account on a flawed metric of foundation, you'll have created a new problem which may ultimately end up being bigger than the initial problem.

Efficient markets... No.

I put this to you - Imagine if this policy was in place prior to the tech wreck 20 years ago. How would have that worked out?

It doesnt influence asset allocation, it influences performance of asset classes. Again, it is benchmarked to asset classes. A 100% aussie equity manager isn't compared to a 100% growth div fund, it is benchmarked to the asx300 (or similiar). I would agree it will encourage index huggers, but the best manager/funds will stand out - those that can achieve consistent long term returns above benchmarks. Ie. Funds that actually add value, as opposed to consistent underperformers.

You say, "It doesn't influence asset allocation, it influences performance of asset classes."

It's the same premise as my previous post. This may require the fund manager to move to certain assets within an asset class to get performance. The investment decision is influenced by what others are doing and not what the investment manager might believe is a better strategy long term.

I said in my last post, the price of wine changes, some investments take longer to mature than others and sometimes it is a good idea to buy umbrellas in the summer. These opportunities may be neglected because of meeting the shorter term performance requirements. Such investing ideas should have merit for investors in the long term but hey, we're not considering that now are we.... I appreciate there are some laggard funds and they need dealing with, however I don't believe this is a good solution.

Also - If we're now going to distinguish good investment managers from bad based on their performance, maybe this is a good time for funds to be considerably more transparent about their assets and asset valuations to ensure that the performance is measured reliably. Seems only fair right?

Why would any manager even bother to stand out " but the best manager/funds will stand out"? What is the point? Much better strategy is to simply hug the index to the last - that way ZERO chance of underperformance and get a ticket to play the game for another year. Let those who want to "stand out" go forth and stand out - they will eventually fall - only need one year for the first strike - then they start to loss members/FUM and you can bet no bonuses that year.

Lesson is, stay with the index.

What the failed funds needed to do was pay someone well enough to get them from Fail to pass like rest super fund.

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