Will we see super funds herding to the same trades?

With super funds under pressure to pass performance tests, there are fears that their investment portfolios could begin to look similar featuring a handful of companies, according to Maple-Brown Abbott. 

The Your Future, Your Super test was conducted annually and examined how a fund had performed relative to a specific benchmark. If they failed, their fund could be closed to new members or required to merge. This was leading to funds being more reluctant to take risks in their portfolios and risk failing the test.

Reflecting on how regulation might not always hit the mark in terms of intended results, chief investment officer, Garth Rossler, said: “With the super funds, the regulator said ‘you can’t dip [performance] too much from your peer next door’ so what are you going to do? You might end up buying the same trades. 

“Is it any surprise that the most expensive bank in the world is CBA? Probably not, it’s the biggest stock in the benchmark, so when the regulator said funds need to combat risk, they would think ‘I better make sure I’ve got some weight in CBA’”.

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Funds would likely seek to own these stocks at any price, Rossler observed. 

“But is that risk diversification or risk intensification? It depends on how you define risk. If you’re defining risk as being different from your peers, then it reduces risk,” he added. 

Duncan Hodnett, head of global distribution at the fund manager, believed this could then be an issue for portability and choice if super fund portfolios looked too similar.

“What we have seen, particularly with the APRA benchmarks, is that when the rotation to value happened, a lot of super funds actually underperformed because of their significant or overweight growth exposures,” he said.

“I think they’ve realised that from a portfolio construction perspective, they had unintended risks in their portfolio and when the rotation happened, they were caught off-guard. For that reason, super funds and financial advisers are making sure that their portfolios are now slightly more balanced.

“With the APRA benchmark test, I do think it will create some sort of herding mentality and that there will be crowds of trades in stocks. One has to wonder whether that will really reduce competition between funds because they’re going to look more similar”. 

Hodnett observed heavy consolidation activity within the industry, highlighting KPMG’s Super Insights 2022 report which noted there could be eight funds by 2025 that had more than $125 billion in assets under management.

“I guess the question is, is it right that big is better? We just don’t know yet in terms of long-term returns. But what we do know is that consolidations are happening – a number of our clients have two or three merger discussions underway at the moment,” he said.