Frontier Advisor’s chief executive Andrew Polson said the market turbulence and supply chain shocks from the outbreak of the coronavirus was a powerful warning that the margin for error in a highly-leveraged and interconnected world was very low and over-regulation inherently risky.

Polson said the volatility, which has already erased trillions of dollars from the stock market, should remind superannuation funds and regulators alike about the value of building resilient portfolios that focused on member outcomes, not peers.

For asset owners, he said that there was significant value in diversity and funds should be focussed on building diversified portfolios that are appropriate for member profiles and their own capability. He added that by having a set of players who find different ways to take advantage of opportunities and manage risks would result in a more robust system for all members.

Polson warned that there was a growing risk that the approach that APRA had taken to their heatmaps: in defining growth and defensive assets; in using the information so publicly; and in focussing so much attention on short-to medium term “peer-aware” performance, had lost the value of diversity and resilience.

In short, he said efforts will be stymied if the prudential regulator continues to go down the path that makes funds look exactly the same.

The consultant conceded that regulators have come out fighting after being chastised by the Hayne royal commission. But, while supporting APRA’s push for better member outcomes, Polson said the focus should be squarely on risk and portfolio resilience rather than on returns.

“It appears to me that APRA is worried about regulating more sophisticated investments and more complex investment portfolios,” he said.  “This may suit their skill set but is not necessarily the best result for members and for funds.”

Polson said he was concerned that regulator’s heatmaps were pressuring many funds to be more peer aware in their investment approach which was especially dangerous at the end of a cycle.

“Just when funds should be taking more member and market risk-based decisions when they construct portfolios, they’re feeling more pressure to take peer-risk based decisions, which will likely be sub-optimal for portfolios,” he said. “The peer-aware mentality is more pronounced than ever with many asset owners indicating that heatmap is a focal point in terms of competitive behaviour for them.”

The Frontier chief said the problem was with the risk to returns over time.

“We’re in the business of delivering of total return to shareholders over time – not returns that are relative to peer risk or relative to benchmark risk,” he said

His concerns also extend to the regulator’s behaviour in terms of wanting more consistency and commonality between funds.

Polson said regulators risk creating more complexity just when super funds need more freedom to deal with what’s coming.

“It’s the way it always happens,” he said. “The horse has bolted; the barn door is shut and we are still trying to work out what we did in the barn.”

“Given the challenges we are likely to face in the future, encouraging more homogeneity and a more peer aware approach with less flexibility and less of a focus on resilience may make the regulator feel better about their ability to oversee funds but is unlikely to be a successful recipe for members and the system in the medium to long term.”

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