Confirmation: YFYS has created super benchmark huggers

Mike Taylor

Managing Editor and Publisher

7 April 2022

A survey of superannuation sector chief investment officers, heads of investment strategy and asset consultants has confirmed that Government’s superannuation performance test has made them distinctly less adventurous and more benchmark aware.

The survey precisely confirms the warnings of industry executives who said the performance test, allied to the Australian Prudential Regulation Authority (APRA) heatmaps would kill off the pursuit of investment alpha and give rise to a cohort of index huggers within the superannuation sector.

The concern about index hugging also appears to have been reinforced by the fact that the survey respondents acknowledged a strong focus on fees because of the after-free focus of the performance test and fees from index investments are generally lower than those associated with active investment strategies.

The survey has formed the basis of a research paper commissioned by J.P. Morgan Asset Management (JPMAM) which concluded that the feedback from chief investment officers suggested that strategies in listed assets would become more benchmark-aware, with high alpha strategies requiring higher degrees of conviction, resulting in smaller allocations.

JPMAM said the survey involved 16 super fund chief investment officers, heads of investment strategy and asset consultants and focused on identifying how they were responding to the Your Future Your Super performance test in their decision-making.

While it found that the chief investment officers were not intending to make major changes to their portfolios unless they were failing the performance test it found they were more likely to:

• Be more cautious with high alpha strategies which require higher degrees of conviction, resulting in smaller allocations
• Be more aware of investment decisions’ contribution to the tracking error to a fund’s strategic asset allocation and prefer more benchmark-relative strategies with lower tracking error within public markets
• Seek opportunities in private markets where there is a clear opportunity to add value beyond the YFYS performance test
• Take positions within niche sectors in private markets that are deemed as “satellite” relative to the strategy’s respective benchmark
• Be more tactical where there are clear opportunities to outperform or underperform
• Continue their high degree of focus on fees, given the after-fee focus of the performance test.

JPMAM pointed to the reality that passive investing was an economical way to have market exposure while maintaining reasonable risk diversification, but noted that it also limited an investor’s ability to deliver returns beyond the benchmark.

As such, we see combining the benefits of passive investing with high-conviction active management as a more efficient way of building a solid portfolio under the YFYS framework,” said Andrew Creber, Australia and New Zealand Chief Executive Officer, J.P. Morgan Asset Management.

“In the alternatives space, manager selection remains paramount and we expect CIOs to explore niche sectors and asset classes in greater detail as those surveyed indicated greater willingness to take higher risk positions in alternatives than in the public market,” Creber said.