Research house Chant West has shared its suggestions for improving the Your Future, Your Super performance test as it is concerned how the test is influencing funds’ behaviour.
It said it had seen evidence of funds rejecting appealing investment opportunities, terminating diversifying strategies because they had a high YFYS tracking error and asset allocation that may have resulted in diminished returns.
“While the test has identified and eliminated some funds that were clearly sub-standard and destined to fail, it has caused collateral damage to others that were seeking to do the right thing by their members but were somewhat unlucky in the timing of the first test (i.e. over seven years of strong returns). More ominously, it has driven the behaviour of the surviving funds in ways that, in too many cases, have resulted in diminished returns for their members. Those are the unintended, and unacceptable, consequences of the current test regime.”
It recommended introducing:
Therefore, it recommended a proposed test which included both risk-adjusted returns and the SRP approach which would capture both a fund’s merits and minimise their shortcomings. A fund’s performance would be compared with the performance of an SRP with the same volatility.
This proposed test had a simple benchmark, simpler calculations, simpler volatility measurements and incentivised funds for strong risk-adjusted returns.
“Our preference would be for our proposed test to replace the current test at the earliest possible opportunity. We do recognise, however, that this would be too abrupt a change, in that funds would have to switch their focus from passing one test to passing a different test.
“It may be, therefore, that a compromise can be achieved by running both the current and new tests in parallel for a short time. If that is the case, we would argue that passing at least one of the tests should be sufficient for survival during this period.”
The firm also agreed with the delay to introducing the test for Choice products but were confident they should be included at some stage, as should all diversified choice options. However, retirement income products should not be tested as they were “grossly ill-suited” to the test.
Amid a challenging market environment, three super fund CIOs have warned against ‘jumping at shadows’.
The professional body is calling for the annual performance test to transition to a two-metric test, so it better aligns with the overarching duty of super fund trustees to act in the best financial interests of their members.
AustralianSuper, Rest, and HESTA agree on the need to retain and enhance the test, yet they differ in their perspectives on the specific areas that warrant further refinement.
Australia’s second-largest super fund has confirmed it is expanding its presence in the UK following significant investment in the region.
Recognizing of course that Chant West has a massive conflict of interest here. - independent ratings /assessments - laughable. The whole process of comparing absolute returns in isolation - without Sharpe ratio, standard deviation, or value at-risk measures across the industry is a total farce. Might as well be investing in bitcoin - for transparency.
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