Statewide Super CIO Con Michalakis (Photo: Matthew Fatches)
Statewide Super CIO Con Michalakis.

The best way to avoid being captured by the government’s proposed performance test is to go into this year with strong returns relative to the listed SAA benchmark reference portfolio, Con Michalakis, Statewide Super’s CIO recognises.

Indeed, according to APRA’s latest data released in December last year, Statewide’s MySuper fund is among the industry’s top performing relative to the six-year listed benchmark portfolio with a 1.12 per cent excess return, the data shows.

APRA’s six-year listed SAA benchmark portfolio is the closest publicly available reference portfolio to the eight-year performance test super funds will be judged against for the first time from July this year. If funds fail to meet the benchmark two years in a row they could be prohibited from taking on new members.

“Because we are ahead of it, we don’t have to think about it too much,” Michalakis told Investment Magazine, referring to the new performance test hurdle.

The government’s new test penalises consecutive years of underperformance, making funds with a track record of poor relative performance more vulnerable to failing. Meanwhile funds with strong past relative performance less vulnerable to subsequent underperformance.

Last year Cbus CIO Kristian Fok gave insight into the psychology of super fund CIOs approaching the first performance test period when he used the term “banked” performance to describe funds that had outperformed the reference portfolio at Investment Magazine’s Fiduciary Investor’s Symposium late last year.

“We have been successful in terms of the outcomes and so for us we have a little bit in the bank,” Fok noted during the Q&A portion of his interview in November

While Michalakis says he doesn’t use the term “banked” performance, he acknowledges that having strong performance relative to the listed benchmark portfolio will be important as the government’s new test begins.

“If we think we can make money we’ll do it. If we think [what we’re about to invest in] has got a return that fits our overall portfolio, we’ll just go ahead and do it and I think that’s the best way to think about these things,” Michalakis says.

Michalakis points to a recent investment in a private credit special situation accounting for about 2 per cent of the value of the Statewide fund’s holdings made in recent months as an example of an allocation to active management that adds tracking error to the portfolio representing a risk to the listed benchmark portfolio.

However he acknowledges the existence of the test will mean funds will need to create a higher hurdle for the performance of its active managers and assets it buys that add tracking error away from the listed benchmark

“When you buy an asset that’s not listed, and you’re trying to compare it to a listed benchmark, you are going to have basis risk, you’re going to have tracking error. That asset is going to be different to the benchmark its managed next to,” he describes.

Since the test was announced last year Statewide has set up a reference portfolio benchmark to keep track of the fund’s performance relative to the performance test

“Because we are ahead of it we don’t have to think about it, we are not captured by it,” he says.

“Thankfully we can continue to manage our portfolios the way we manage them… In future years if you go active you have to really make sure your active is working,” he adds.

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