Conservative choice products to struggle with YFYS test
Conservative choice products are set to be challenged by the Your Future Your Super (YFYS) performance test after several inconsistencies were revealed in the 2021 MySuper performance test, according to Chant West’s General Manager, Ian Fryer.
Fryer highlighted how some funds encountered problems when components of MySuper products, with growth-style portfolios, were measured against benchmarks that had different characteristics.
“This situation is likely to worsen when conservative choice products are subjected to the test,” Fryer said.
“We are living through a period of exceptionally low interest rates globally, and the overwhelming consensus is that interest rates are set to increase in the short to medium term.
“Given that outlook, funds have taken appropriate action in recent years to reduce the risk for their members by reducing the duration of their bond holdings and/or reallocating out of bonds and into defensive alternatives.
“We have already seen how those rational decisions have hurt funds in the performance test.”
Fryer revealed defensive alternatives were classified by the Australian Prudential Regulation Authority (APRA) as 50 per cent growth, which caused funds’ exposure to these assets to decline when they were measured against an unsuitable benchmark.
He also said the benchmark indices APRA used for fixed interest had no ‘risk awareness’ and were longer in duration than most funds’ actual exposures.
“The seven-year return to June 2021 for short duration bonds (about 0–3 years) was 2.4 per cent a year compared with 4.1 per cent a year for the broader bond market (typically 6–7 years duration) based on a 50/50 split between Australian and international bonds,” he said.
“This discrepancy hurt a lot of funds in the 2021 MySuper performance test and, unless yields rise significantly, will hurt many more funds’ conservative options in the 2022 choice performance test.”
Fryer also told attendees at a briefing today that these inconsistencies in the performance test fail to achieve its goal in measuring whether the fund’s investment strategies are most appropriate for its members.
“Ultimately… it tries to boil down a fund’s performance into one number that will determine whether it passes or fails,” he said.
“The result is that those funds, or those conservative investment options, may fail the test simply because have been targeting different benchmarks, even though they have been doing this in the best interests of their members.
“While there is a clear attraction for a ‘bright line’, pass/fail test, unfortunately the test is less ‘bright line’ and more ‘blunt instrument’ which is why we will see more and more problems with this performance test.”