Choosing between active and passive fund managers is likely to become more difficult for super funds in the future if they come under pressure from annual performance tests.
Under changes in the Your Future, Your Super bill, the Australian Prudential Regulation Authority (APRA) would construct an individual benchmark for each MySuper product based on its asset allocation.
This would then be compared against its custom benchmark and products which underperformed their net investment return benchmark by 0.5 percentage points per year over an eight-year period will be classified as ‘underperforming’.
Whitlam Zhang, manager of research and strategy at Parametric, said: “Clearly this will change the way super funds think about fund manager selection. It will raise the bar for how much conviction is needed before selecting a fund manager.
“It will also lower the appetite and patience of investment teams in strategies that may suffer large drawdowns for long, drawn-out periods of underperformance.” Trade-offs would also likely have to be made, Zhang said, in order to work within the constraints of low risk appetite where allocations were shifted to listed markets and the amount of active risk taken was reduced.
When it came to choosing between active and passive funds, it was not necessarily a safe option to go for a passive fund as not all asset classes were available, there were fewer options for customisation and return expectations were lower.
“Indices can vary greatly within an asset class and selection of an index can potentially introduce as much active risk as an active fund manager. And in the passive investment universe there is no flexibility to incrementally add value through tax management.
“Fund trustee should consider tax-managed passive investing, particularly in listed equities portfolios, which are generally the biggest drivers of risk and return in a super fund portfolio,” Zhang said.