QSuper head of investment strategy Damian Lillicrap believes ordinary savers would be better served if more superannuation funds dumped their peer-relative performance objectives, as the $65 billion default fund for Queensland public servants did in 2011.
QSuper previously had a peer-relative performance objective: to beat the median super fund return over a three-year horizon. But Lillicrap argues that super funds are in a better position to achieve risk-adjusted returns if they break from peer anchoring.
Australia is one of the most peer-aware institutional investment markets in the world, he said.
Following losses from the tech wreck and global financial crisis, QSuper decided to remove its peer-relative objective so it could freely alter its asset allocation to take a smoother path and gain better long-term results for its members.
This meant moving from the equity-heavy asset allocations common to Australian super funds, and towards more unlisted assets – a construction that overseas endowment funds use.
“Now we are peer aware, but we are not peer anchored,” Lillicrap told delegates at the Investment Magazine Fiduciary Investors Symposium, held in the Blue Mountains, NSW, on May 15-17, 2017.
“We like to know what peers are doing, we like to know what everyone’s doing around the world. We just don’t necessarily have the same asset allocation as them if we think there is a better approach that suits our members better,” he explained.
After dropping its peer-relative objectives, QSuper’s total portfolio allocation to equities fell from about 60 per cent at the time of the GFC to 37 per cent in May 2017.
“If you don’t change your asset allocation and the same event happens, then you won’t get a different outcome,” Lillicrap said.
On average, super funds have an allocation to equities of 50 per cent, Australian Prudential Regulation Authority data for the December 2016 quarter shows.
QSuper also has an above-average allocation to fixed interest, at 23.5 per cent, and infrastructure at 12.6 per cent, compared with industry averages of 13 per cent and 5 per cent, respectively.
“Other super funds we speak to say because they all have a similar return target, usually around CPI +3.5 per cent, it makes sense that they have the same outcomes in terms of asset allocation,” Lillicrap said. “That may be true, except if you look around the world there are lots of other regions where institutional investors have targets [similar to those in Australia] but their asset allocations are very different.”
He added that these investors’ asset allocations all looked similar within their various cohorts.
“The inescapable conclusion is that peer anchoring is global but not universal.”
With this in mind, funds would benefit if they stopped looking at their peers’ straight returns in favour of a risk-adjusted objective, Lillicrap argued.
“Most people in the industry are aware of who the top-returning funds are, but not as many are aware of which funds have the best risk metrics, or the best return for risk.”
He challenged the industry: If risk-adjusted returns are important, then more should be done to track and measure them.
“If you don’t measure those kinds of things, are we really managing it?” he asked.
