“Do funds invest similarly because we’re concerned about what others are doing or because we’re reacting to the same information?” asks Kristian Fok, deputy director at Frontier Investment Consulting, which advises on $117 billion in assets. “If you look at the asset allocation of portfolios and how they have evolved over the last 10 years, there has been change. If there was a true, blinkered lack of innovation because of peer risk, we wouldn’t have found changes over time.” In the five years to December 2011, the major trends for both not-for-profit and commercial funds were reductions in stocks and boosted allocations to so- called growth alternatives such as hedge funds and private equity (see figure 1).
While investment performance is a crucial element of super, it’s still just one ‘input’ to the ultimate return or ‘outcome’ that members receive in retirement, Drew says. The amount of money that members commit to super during their careers, and the way their peak savings are managed as they approach and then enter retirement, are at least equally important. But these inputs are far more difficult to measure and compare.
“We seem to be fascinated by what we can measure easily – the return,” Drew says. Consequently, other inputs such as contribution rates and risk management techniques don’t receive the attention they deserve. “Are we measuring and managing towards an input, or are we measuring and managing towards an outcome?” he asks.
Incentives to change Investment committees should compare their funds’ returns with competitors’ over different timeframes, Drew says. It’s a discussion that helps good governance.
But it’s a closed conversation. Fund boards should focus on the practical matter of overseeing investment strategies. This includes ensuring that older members’ investments are safely converting them into a steady source of retirement income, or what Drew calls a “member outcome”.
Funds must help members set clear superannuation goals. Members understand the ASFA Retirement Standard, which benchmarks the annual costs of modest and comfortable lifestyles for retired Australians, or the defined-benefit terminology of a multiple of their final salary. Investment jargon, however, is foreign.
“If you have an objective of CPI plus 4 per cent, what does that actually mean as an outcome?” Drew asks. “Members live off after-fee, after-tax, risk-adjusted returns. These returns aren’t in a vacuum. This is money in the bank.”
Funds aiming to craft investment strategies that better meet members’ objectives should give their investment teams more rein to invest opportunistically in a genuine pursuit of higher returns, Fok says. This requires greater co-operation and sure trust between the board and the investment team.
Chant West, David Neal, Michael Drew, super funds, peer risk, Griffith University, superratings, John Maynard Keynes, rankings, Kristian Fok, Justin Wood, ASFA Retirement Standard, Future Fund, Frontier Investment Consulting
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