Outgoing Mine Super CIO David Bell (Pic: supplied)

Gaming the system to make fund performance appear better than it actually is for the amount of risk taken could be more difficult by this time next year if proposals for new growth and defensive categorisations – released today – are broadly adopted by the superannuation industry.

The lack of standardisation around growth and defensive asset categorisations is widely known by the superannuation industry to result in poor performance measurement and risk comparisons.

Creating a new standard for the categorisation of growth and defensive will mean the super industry is assessed in a more robust way and funds are more accountable for performance, David Bell, Conexus Institute executive director and head of the growth/defensive categorisation project, said.

The Conexus Institute released detailed thinking behind its new categorisation proposal on Thursday which is now open for industry consultation through September this year with a new standard to be introduced by June 30, 2021 or earlier. The consultation paper can be accessed here.

“What we are doing in a way is removing excuses some funds might use to claim they’re underperforming their peers… it also means we can celebrate the best performers without a question mark,” Bell said, based on his experience that simplistic and subjective categorisations have resulted in widely different performance outcomes between like funds. Bell was chief investment officer of Mine Super before establishing the Conexus Institute in January 2020.

The importance of standardisation in asset categorisation is heightened now it’s an input into Heatmap calculations which the prudential regulator uses as the basis of determining fund underperformance and to promote the idea of further fund consolidation, Bell noted.

“This is an opportunity for standards to be industry-led rather than be dictated to by regulators and government on what the standards should be,” Bell said.

The Conexus Institute report and recommendations outlined a slightly less prescriptive but potentially more complex (in terms of the detail required in its assessment of asset categorisations) to other approaches such APRA’s own guidelines standardisation that might be developed by other authorities such as the Australian Accounting Standards Board.

At the end of last year AMP chairman and inaugural Future Fund chairman David Murray said the AASB could be better placed than APRA to take on super fund standardisation on the back of recommendations from Graeme Samuel’s APRA capability review.

An APRA spokesperson said the prudential regulator recognises the benefits to all superannuation industry stakeholders, including members, of having a widely accepted, consistent approach to categorising and distinguishing between growth and defensive assets.

“APRA supports industry-led efforts in this area, and encourages all superannuation trustees and other interested stakeholders to participate in the consultation process. APRA is following the work of the Industry Working Group closely, and intends to participate in the consultation process,” the spokesperson said.

Outside of the staple assets included within the growth and defensive categorisations such as equities, bonds and cash, the Conexus Institute report raises a scoring system for less easily defined assets including unlisted property and infrastructure, alternative assets and high duration bonds. The Institute uses risk exposure and loss potential as well as leverage and asset purpose assessment to map unlisted assets to appropriate growth/defensive scores. Read the detailed proposals of the new standards here.

“I fully expect this report will generate a lot of criticism and comments because it’s an area that’s existed in the realm of subjectivity for so long,” Bell said.

The debate about growth and defensive categorisations has been ongoing for many years, SuperRatings executive director, Kirby Rappell acknowledged.

“As the industry matures, consumers need to have confidence in where they are invested and that what they are getting is what has been explained to them,” Rappell said.

“I look forward to seeing the impact this proposal will have on the way different assets are categorised,” he added.

Smith is head of content and managing editor of Professional Planner and Investment Magazine.
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