YFYS test will lead to ‘herd mentality’

Trustees will be too focused on outperforming the Your Future, Your Super (YFYS) performance tests rather than delivering tangible member outcomes, according to industry fund HESTA.

Speaking at the Australian Institute of Superannuation Trustees (AIST) Superannuation Investment Conference, Sonya Sawtell-Rickson, HESTA chief investment officer (CIO), said one of the real challenges of YFYS was that it did not measure member outcomes.

“Every fund is now thinking ‘how do we measure the tracking error and risks against the benchmarks’ and ‘are we comfortable with what’s driving that relative risk and are we confident in that performance’,” Sawtell-Rickson said.

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“It doesn’t measure absolute return or the net outcome after fees, the fees aren’t cumulative eight-year fees, they’re just the latest fee numbers and not what members have experienced.

“Because they’re not measuring absolute outcomes, just this concept of implementation, you could have a top-performing fund in the universe failing the YFYS benchmark.”

The inaugural results were released by the Australian Prudential Regulation Authority (APRA) yesterday, which saw 13 super funds receive the ‘fail’ mark.

Asked whether the introduction of the performance tests would change the way super funds viewed investments and drive the industry to more of a herd mentality, Sawtell-Rickson said the answer was yes.

“I’d love to say no, but the reality it’s just such a significant, important and punitive measure that every board, every investment committee, every investment team is going to be focused on ensuring they outperform that measure,” Sawtell-Rickson said.

“The measure has challenges – number one is the retrospective nature that is applies over the last eight years.

“It’s not often in an investment environment where you get retrospectively measured against a benchmark that you weren’t told about.

“The second challenge is the way they’ve proxied some benchmarks creates tracking error, perhaps the best example is private equity.

“They’ve taken a private equity exposure, proxied it to a listed benchmark and in any 12-month period that could have a tracking error of 10% or more.”

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