Passive alone unlikely to beat YFYS test

Superannuation funds are expecting to find it “challenging” to include assets such as emerging markets or small-cap equities as they seek to pass the performance test, according to a J.P. Morgan Asset Management report.

The report with NMG Consulting surveyed 16 chief investment officers, head of strategy and asset consultants regarding the impact of Your Future, Your Super (YFYS).

“The survey indicates while chief investment officers (CIOs) are yet to make significant changes to their investment strategies, changes will happen over the coming months and years,” the report said.

“The feedback suggests that strategies in listed assets will become more benchmark-aware, with high alpha strategies requiring higher degrees of conviction, resulting in smaller allocations. In the alternatives and unlisted space, CIOs are expected to take advantage of the full range of niche and higher alpha strategies.”

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Strategies with low tracking error were expected to be popular while those with high alpha opportunities such as small-caps or emerging markets were likely to be “challenging” to justify in the future.

Within equities, CIOs were expected to consider more benchmark-aware strategies while index funds were hindered by their inability to perform beyond the benchmark and because their stock selection was determined by index providers.

In bonds, there was likely to be a preference for benchmark-aware fixed income strategies while alternatives were likely to be considered as part of a satellite approach as niche strategies could add significant value.

Andrew Creber, Australia and New Zealand chief executive, said: “Although passive investing is known as an economical way to have market exposure while maintaining reasonable risk diversification, it also limits investors’ ability to deliver returns beyond the benchmark.

“As such, we see combining benefits of passive investing with high conviction active management as a more efficient way of building a solid portfolio under the YFYS framework.”