Super performance test ‘not a barrier for innovation’: ART

Amid claims that the annual performance test disincentivises sustainable investments, Australian Retirement Trust’s (ART) head of investment strategy said he does not believe this to be the case.

In March, the government announced the launch of a consultation into the design of the annual superannuation performance test. At the time, it cited evidence “the test may be influencing investment decisions to the detriment of member outcomes, including discouraging investment in asset classes that may otherwise be in the best financial interests of members”. 

As such, Treasurer Jim Chalmers said at the time the consultation aimed to ensure super funds are able to invest in a way that delivers the best possible returns for members. He highlighted that the government did not want to direct super investments. 

“The performance test is driving good outcomes, but industry has raised concerns the current test is holding back investment in some sectors that could provide strong returns for members, such as the energy transition and affordable housing,” he said.

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Weighing in on these concerns, ART’s Andrew Fisher told Super Review that the performance test in itself is not a big hurdle.

“I think any new and innovative investment that we do, we do have to have a level of discipline around the decision we make, we have to act in members’ best financial interest, and so the performance test serves to apply that discipline with benchmarking tools,” he said.

“As an industry, we need to learn to work within the construct of the test.

“I don’t think it’s a hurdle to innovative new things – it’s just something you need to think about.”

The mega fund, which manages more than $260 billion in retirement savings for 2.3 million members, announced its roadmap to net zero in September 2023. In it the fund outlined how it plans to accelerate the journey towards a net-zero greenhouse gas emissions investment portfolio by 2050.

Among other things, it said it plans to engage with 100 per cent of ‘priority companies’ in the listed equities portfolio by 2030, which are defined as those responsible for 70 per cent of financed emissions.

Moreover, it said at the time, the plan is also to align 50 per cent of these priority companies with ‘net zero’ or ‘aligned’ status in terms of a net-zero pathway within listed equities by 2030.

“Climate change is an indisputable risk in portfolios, so it’s a risk we need to manage,” Fisher said.

“Net zero is a really important ambition and we’re working towards that, and what we think about doing is, how do we manage the active investment risk that we need to take as well.”

He explained the fund utilises low carbon benchmarks that are optimised below tracking error against traditional benchmarks across its listed equity portfolios as it seeks to manage investment performance with sustainability goals.

Meanwhile, managing track error has been raised as a concern for the superannuation industry as a whole. Namely, recent data from global index provider Scientific Beta suggested performance testing imposes tracking error targets that tether funds to high-emitting companies, inadvertently restricting fund investment behaviour to continue to fund high-carbon emitters regardless of their ESG performance.

Unlike the low-carbon benchmarks readily available in Europe, the absence of a Your Future, Your Super-compliant low-carbon benchmarks in Australia leaves super funds with few viable options, Scientific Beta stated.

“Tracking error constraints on super funds make it difficult to act [and] limits how much they can do in terms of financing climate solutions,” Erik Christiansen, head of investment solutions for Scientific Beta, told Super Review.

“If they decide to focus on or be overweight companies that provide climate solutions, that could lead to tracking error.”

Passing the performance test

For ART, balancing investment performance with sustainability remains crucial given its QSuper Socially Responsible option was among those that failed the 2023 annual performance test, returning some -0.41 per cent per annum during the 2023 financial year.

At the time, a spokesperson for ART said the mega fund was “disappointed” with the result and was intending to close this option from 1 July 2024.

“We take investing our members’ retirement savings seriously. In accordance with our merger transition program, we are moving towards a harmonised investment menu for all members from next year,” the spokesperson explained.

“As such, we intend to close this option from 1 July 2024 and members will be able to choose other investment options, including Australian Retirement Trust’s Socially Conscious Balanced option. In the meantime, we have already made a range of changes to this option’s investment strategy and asset allocation which we believe will improve its performance.”

Speaking to Super Review, ART’s Fisher noted the fund’s other sustainable investment option has “done quite well” and “doesn’t have any real challenges with the performance test.”

“From my point of view, we believe sustainable investment leads to better long-term investment outcomes, and the performance test is a measure of long-term investment outcomes, so I think it’s incumbent on us on behalf of our members to invest well, pass the performance test, and invest sustainably,” he said.