Managed accounts now exposed to super performance test
The Australian Prudential Regulation Authority (APRA) has confirmed the degree to which managed accounts can be factored into the Your Future Your Super (YFYS) superannuation performance test.
The regulator has confirmed has stated that separately managed accounts can be deemed to be Trustee Directed Products (TDPs) which are now being assessed under the performance test.
The APRA position is made clear in an update of frequently asked questions around the performance test and TDPs in which it says that SMAs and other managed accounts can be TDPs depending on how the product features operate.
APRA said that, in practice, this would be determined by the ability of the beneficiary to alter the strategic asset allocation of a particular covered asset class.
Referring to the regulations flowing from the Superannuation Industry (Supervision) Act, it said that if a beneficiary of cannot require the trustee of the fund to alter an amount attributable to the beneficiary to be invested in a particular covered asset class in an investment option then that product satisfies the TDP definition.
“Conversely if a beneficiary can require the trustee of the fund to alter the covered class amount of the investment option then it cannot be a TDP,” the APRA explanation said.
APRA has also clarified that managed investment schemes (MISs) can also be wrapped up in the TDP performance test, stating that all investment options should be assumed to be subject to the test.
The regulator also made clear that there would be broader implications if a TDP failed the performance test within one superannuation fund, but not another.
It said that while the performance test and the failure of a TDP would be specific to the particular RSE licensee, APRA expected other licensees would review their position.
“…if an investment option fails the performance test, APRA expects all RSE licensees offering the option (regardless of whether it is classified as a TDP as part of their offering or not) to consider whether the performance of the investment option allows the RSE licensee to hold the view that it is in the best financial interests of members for the option to be continued to be offered,” APRA said.
Has anyone done any research into the herding effect that this ridiculous expansion of the policy will generate?
In my opinion, Canberra have got this utterly wrong (as usual).
How many billions of dollars of misallocated capital and how long will it take to determine that this was a silly idea?
My guess is finance historians will look back on this in 30 years time and write yet another piece about how well intended policy generated poor outcomes.
Without a diverse range of investments there is definitely herding.
This has resulted in fund flows into index options and away from active options. It will eventually mean the demise of active management.
The current markets have been conducive to index funds, but what about when they do not favour these type of strategies, and no active managers are left?
You also have to wonder what happens when markets take a dive over a 2-year period and all index funds are delivering negative results. Do all funds fail the APRA test leaving almost no available funds for investment?
Funds have maximum capacities too in order to be effective, so herding generates significant market risk. Not sure whether these issues were properly considered or understood.
Another policy with good intentions but potentially dire consequences for both investors and markets in general.
I see your point but surely at a certain point if too much investor money is held in passive funds there will emerge pockets of inefficiency and arbitrage for active players to benefit from. The market needs the “price search” function of trading to determine market value long term.
I do agree though that it’s been a very narrow focus from our regulators and Gov’t that has pushed super funds this way. It’s worked over the past decade because markets have been abnormally strong and stable. I suspect a significant and prolonged correction could see a change in that approach and a return of focus to more prudent risk management (and I’m sure the regulator will take no responsibility for having forced the industry towards this situation and indeed, advisers will probably be to blame).