Super benchmarks are counterproductive: IFM, Mercer
The government’s proposed benchmarking for the superannuation sector could have the opposite of the intended effect on investment performance, major industry players have warned.
The Your Future, Your Super reforms, as declared with the government’s federal budget, include super account stapling to prevent the creation of multiple accounts for members and a comparison tool for consumers called YourSuper, which will publish fund performance and expenditure.
From July next year, APRA will also begin to conduct benchmarking tests on the net investment performance of MySuper products, blocking those that record poor returns during two consecutive years from receiving new members.
The move has built upon APRA’s previous benchmarking of the sector across factors such as performance and fees in its heatmaps, which the regulator began publishing last year.
However, David Neal, chief executive of IFM Investors has voiced fears around the government’s budget reforms for the superannuation sector, that its efforts to benchmark the performance of super funds could have negative effects for investment managers.
“The fascinating thing about benchmarking is that the moment you start measuring someone, the measure tends to influence the way you go about doing what you do,” Mr Neal said to the House of Representatives standing committee of economics on Friday.
“Very simplistically, perhaps the moment you put a benchmark alongside it and tell someone that there is a very severe consequence of them falling short of that benchmark over any one period, or indeed only once, the moment there is a severe consequence, they feel the need to manage their risk relative to that benchmark.”
The concern here is that investors would no longer be focused on their investment making or losing money, instead zeroing in on whether they have managed to beat or fall below their benchmark.
“If the benchmark is down 10 and you’re only down eight, ‘Happy days, I’ve beaten the benchmark’. Most people would think that that’s not a definition of risk that makes sense for a long-term investor,” Mr Neal said.
“If you’re a superannuant, you don’t feel great about the minus eight. What you wanted was a good return. It changes the way that you think about investing.”
He added it would be fine to use it as measure to check a manager’s performance, but there could be consequences to use the standard as a “big stick to hit someone with”.
Mr Neal, was previously CEO of the Future Fund, which had a 10-year return of 8.9 per cent per annum, as reported in its September quarter update, beating its own benchmark target of 6.2 per cent per annum. However, the sovereign wealth fund does not benchmark itself against other funds.
“At the Future Fund we made a strong statement that we don’t use benchmarks,” Mr Neal said.
“…That was quite deliberate. We did that because it creates this sort of behaviour, and we thought it was counter-productive to generating long-term returns.”
David Bryant, CEO and Australia and Pacific zone leader for Mercer echoed the points made by Mr Neal, when he later fronted the House committee.
“One of the witnesses earlier today – I was observing the proceedings of the committee – noted that there may be unintended consequences in terms of how investors change their approach in order not to be an outlier when the basis of measurement is attached to benchmarks and indices,” Mr Bryant commented.
He added that the benchmarking reforms could see investors follow index strategies, rather than generating their own plays.
“So a consequence of an index approach in a particular area, if investors did that – and I’m not saying all investors would but that there may be a predisposition to do so – is that investors would follow that index rather than perhaps exercising more individual choice because that would increase the risk of falling outside of the peer group,” Mr Bryant said.
Kylie Willment, chief investment officer for Mercer Australia commented past performance should not be the only measure, given it is not a reliable indicator of future performance.
“The base test is on the premise of past performance being a reliable indicator of future performance, [it] should include all the behavioural elements, I think, from potential fall of funds to index hug and particularly herding towards that benchmark,” she said.
“Some of the statements that came out of the Productivity Commission were that they would take past performance into consideration as a track record measure but also look at the investment strategy of a fund and assess its ability to assess the performance on a forward-looking basis as well,” Ms Willment later added.
According to the pair, Mercer has not engaged with Treasury on the government’s planned reforms for super benchmarks and reporting, but it has been in talks with APRA and the Productivity Commission.
