Super performance test could create oligopoly

The Government’s proposed superannuation performance test could drive the market towards an oligopoly structure which could create diseconomies of scale and concentration risk, JANA believes.

JANA principal consultant, Matthew Griffith, said in a column that will appear in the next magazine edition of Super Review there was a view amongst some policymakers that only eight to 10 mega funds (or less) was optimal.

“Even with a hypothetical industry of only four mega funds, there will be one upper quartile and one in the lower quartile,” he said.

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“There are limits to killing the bottom quartile, and you may create a system that achieves ‘mega scale’. However, this comes with diseconomies of scale and concentration of risk with massive funds under management under the purview of a shrinking and smaller group of fiduciaries.”

Griffith also said the test had potential for less innovation and had consequences detrimental to super fund members.

He said it could result in asset allocation based on an index or peers rather than investment opportunities that were in the best interests of members and could make them more fee conscious.

This fee consciousness could result “in approaches that limit access to high potential return but higher cost investment opportunities that would be expected to improve returns and/or reduce risk (e.g. including nation building infrastructure, property, and support for entrepreneurs through private equity and small public companies)”.

Griffith also said it could see trustees being less prepared to adopt longer-term investment approaches for fear of failure of not meeting the performance test.

“…market behaviour might actually continue to focus on shorter term measures, resulting in net cash outflows from some very high quality, strong long-term performing funds that have weaker shorter-term performance,” he said.

“The new benchmark regime assesses funds on only one criteria. In reality, the best fund for any member is a combination of risk alignment, performance objectives, investment approach, appropriate insurance, and service levels including advice.”

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Until the industry agrees on asset allocations this cannot work. Also, until Industry funds are decoupled from their conflicted ownership and valuation structures they will continue to game the system.

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