How a third of platform TDPs passed the performance test
Research and ratings house, Morningstar has released new analysis confirming some retail superannuation funds have been resorting to fee rebates to ensure they pass the Australian Prudential Regulation Authority (APRA) performance test.
APRA itself has pointed to the fee behaviour, and the Morningstar has confirmed the reality of just how many trustee directed superannuation products (TDPs) on platforms have managed to achieve a ‘pass mark’ by almost literally a hair’s breadth.
Morningstar has noted the relative underperformance of platform TPDs and said that, by taking a closer look, an unusual trait had been revealed – “a heavy concentration of products just above the pass mark of negative 0.5% per year”.
“Of the 75 products with test results disclosed, 25, or one-third, scored between negative 0.4% and negative 0.5% per year. What’s more,12 of these returned negative 0.49% – just 0.01% inside pass territory!” the analysis said.
“How did this anomaly occur? APRA has pointed to fee rebates as a key factor. That is, for some products, trustees provided enough of a rebate to lift the products out of “fail” territory.
“While fee reductions are no doubt welcome for members (certainly more so than fee increases!), APRA has since put trustees on notice—the regulator will engage with relevant platforms about the need for a persistent improvement in investment performance, even if a product has technically passed the test.”
Looking at the performance test and its impact on superannuation funds generally, the Morningstar analysis noted that fear of failure had been said to encourage funds to “hug” YFYS benchmarks
However, it said this was not the entire picture, and that in Morningstar’s observations benchmark-hugging may also be due to the growing capacity constraints that mega-funds can face for active strategies in certain asset classes – above all, Australian listed equities.
“Additionally, many major funds are now performing so far above the test’s pass mark that they are less concerned about failure,” it said.
Morningstar also noted that the simplicity of the performance test left it susceptible to ‘gaming’ by funds who might allocate in ways that offer a high probability of passing the test.
In my view, it is absolutely farcical by APRA.
The methodology hard baked and used in the TDP assumes the client has a balance of $50k which is completely inappropriate for wrap platforms.
Guarantee products which are valuable to clients put in a position they cannot possibly pass.
97% of investment options available to the public aren’t covered by the test. So a client might leave an investment option which has failed TDP but then transfer to something worse.
Trustees are being forced to rebate index options to meet APRAs foolish approach to defining what performance actually is.
These observations in the article are what you get when a well intended bureaucracy cooks up an absolutely terrible receipe.
Needs to change immediately.
Government must gurantee returns and refund any loses if they set the performance test, you cannot run this without any responability just because you the government want to direct super funds to invest more money in Australia.