The requirement to pass the Your Future, Your Super performance test is prompting external managers to offer different investment options, according to Schroders.
Speaking to Super Review, Simon Doyle, chief investment officer at Schroders, said super funds were sometimes hesitant to go with funds that invested outside of the Australian Prudential Regulation Authority’s benchmark.
According to APRA, the multi-asset benchmark had a 50% global equity and 50% global bond split.
This had led Schroders to launch an alternative version of its multi-asset fund which invested in line with the benchmark.
“We don’t run our multi-asset fund in the same way as the APRA benchmark so we may end up underperforming. Some funds are fine with that but others want to change.
“So we have launched our Global Active Allocation (GAA) fund which was seeded by an institutional investor and is directly managed to the benchmark. So there are now two different strategies which had to be developed under the new YFYS approach.
“The reputational and regulatory risk [if they fail the test] is punitive and how they manage risk is a key focus for super funds, they will need to decide where they take active risk.”
This GAA strategy would be open to other institutional investors in the future, Doyle said.
This was echoed by a report by J.P. Morgan Asset Management which stated chief investment officers had changed their priorities when selecting mandates in light of YFYS.
It said: “This may lead to product design changes where fund manager selection becomes more prominent and asset allocation becomes less likely to deviate from a specified strategic asset allocation. There is also expected to be greater fee sensitivity given the ‘net of fee’ nature of the performance test. Over the long term, this may lead chief investment officers (CIOs) to be more cautious about their exposure to higher-risk investment strategies”.
However, Doyle felt there would still be a place for external managers and it was unlikely funds would look to move 100% of their assets in-house.
“The role for external managers is changing as more super funds move to internal management.
“Some assets make little sense to move in-house, I doubt it will ever be 100% as there is a lot more that external managers provide than just investment such as governance and research.”
Another reason against internal teams was it was harder to get rid of an underperforming team in the same way a fund could exit an underperforming mandate run by an external manager.