Frontier’s Paul Newfield (pictured) and his team spend a lot time analysing components of listed sectorial benchmarks and contrasting these with characteristics of unlisted asset holdings for funds that will soon be required to measure their performance against the proposed Your Future, Your Super performance benchmark.
“I wouldn’t say funds are necessarily changing what they’re doing at this stage, but there is a lot of work going into understanding the components of the listed benchmark and how it differs from a real asset portfolio,” Newfield, who is director of sector research for consulting firm Frontier.
Newfield will join Mercer’s Emily Barlow speaking at Investment Magazine’s Fiduciary Investors Symposium on Wednesday under the topic heading ‘Consultant Disruption: Self reflections and projections.’
The differences between the components of listed benchmarks and corresponding real assets in most cases are vast in terms of their sectorial and geographical makeup, Newfield says, highlighting that most of the work he is doing relates to infrastructure and real estate assets.
It’s the differences between the listed benchmarks and real asset holdings funds are examining carefully as YFYS reforms make their way towards the Senate for discussion. An Economics Committee report is due to be tabled on April 29 in advance of a discussion in the Senate expected around the time of the May Federal Budget.
Should the legislation pass in its current or in some kind of augmented form, different funds will likely have a different approach to meeting and exceeding the listed strategic asset allocation (SAA) benchmark by at least 50 basis points which underpins the so called ‘bright lines’ performance test, Newfield highlights.
“Those funds well ahead [of the performance test] will continue to focus on their CPI or peer performance expectations and not focus on the performance test in the near term because they’ve got a lot of cushion, but there will be other funds that will need to [account for the listed performance benchmark] if they’re quite a lot behind,” he notes.
Newfield adds the government’s performance test proposal is retrospective and could require an adjustment to existing strategies.
“It’s like you’re have been running this race and your whole strategy for the race was it was for 100 kilometers but then being told half way through it’s a lot shorter,” Newfield comments.
Away from the performance test, Newfield says funds now more than ever need to get clear about what outcome they are trying to achieve.
“Funds generally assess their relative performance in one of three categories: CPI-plus outcomes, performance relative to peers and the new performance benchmark, Newfield highlights.
Generally Newfield says he expects funds adjusting their investment strategies to more closely track a listed performance benchmark will end up introducing additional volatility and risk by trying to retain the same return objective previously articulated to members.
“Our observations are that you’re actually taking more risk to get the same outcome if you’re beholden to beating the listed benchmark,” he says.
