The Cooper Review’s MySuper proposal dangerously entrenches the outdated notion of a fixed strategic asset allocation, Schroder Investment Management CEO Greg Cooper has warned. Cooper last month welcomed Bill Shorten’s appointment as Minister for Superannuation and Financial Services, saying he’d bring a fresh eye to the industry informed by his experience as an AustralianSuper trustee. That said, Cooper said Labor faced four challenges in its handling of superannuation. First, the super guarantee had to be increased more rapidly than the present timetable; second, SuperStream must be implemented to eliminate inefficiencies; and third, super funds had to be encouraged to stop comparing themselves with their peers.
“Fourth, MySuper has missed the point because it’s institutionalised asset allocation for funds,” said Cooper. “MySuper institutionalises the current portfolio structure of a fixed SAA and concepts such as ‘growth’ and ‘balanced’. It also effectively suggests this single strategy is appropriate for all default employees. “The reality is that a ‘product’ framed by reference to a fixed strategic asset allocation has a very volatile real risk profile that can be quite inappropriate for a lot of the workforce. Given the nature of the accumulation of contributions over time, the order in which you achieve returns matters just as much as the actual returns – MySuper doesn’t address this at all,” Cooper said. Super fund members “don’t care and they don’t understand” about the particulars of asset allocation, he said, but “they are conscious of the outcomes”.
Schroders’ head of fixed income and multi-asset, Simon Doyle, said funds had to move away from benchmarking themselves with peers and move towards “structures which need to be more flexible”. “What are a fund’s expectations about return to members?” he said. “A lot of resistance [to change] in the industry is a concern over peer risk.” Cooper and Doyle threw down the gauntlet to the super industry, saying it had not used the advantage of its scale. “The big arbitrages are scale, complexity and time horizons,” said Cooper. As funds’ assets had grown, so had the number of managers and fees charged, but “a lot of funds don’t play their advantage,” said Cooper. “Funds should be using less managers, not more, and getting better deals.”
The second missed-ball was in unnecessary complexity such as CDOs (collateralised debt obligations) and alternatives, which also merely increased fees and lowered members’ returns. The third area, time horizons, was also an area which needed urgent attention by Bill Shorten, said Cooper and Doyle. The Government should be discouraging short-term comparisons, and foster longerterm returns. “Look at returns over three years, five years, 10 years,” said Doyle, “and compare them with the funds’ Product Disclosure Statements.” However, while Cooper and Doyle acknowledged the market pressure exerted by ratings agencies, they also suggested a way of resisting this short-term view. Funds should unify and stand against the push to publish ratings which fed concern with short-term performance and were pushing funds into public-company modes of reporting each quarter. “Maybe the industry could all stop reporting to the ratings agencies,” they said.