News that the Your Future, Your Super amendment Bill passed through parliament this June was more bitter than sweet for around 20 or so funds with a decent chance of failing the performance benchmark. This is particularly true for Ross Piper (main picture) and Mark Rider, chief executive and chief investment officer of Christian Super, who are in no doubt about their fate and plan to face their reckoning head on.
Any way you look at the numbers, Christian Super, the $2 billion fund with just over 30,000 members is certain to fall short of the strategic asset allocation listed benchmark hurdle set by the government.
APRA’s latest publicly available (December 2020) MySuper Product Heatmap data clocks Christian Super’s default ‘My Ethical Super’ at a net investment return of -0.65 per cent over 6 years, relative to benchmark performance.
For the eight years of the performance benchmark period including fees Rider estimates the fund will underperform the SAA benchmark by closer to 1 per cent, far enough away from the 0.5 per cent performance test hurdle that no amount of improvements like the ones that have been flowing through to relative benchmark performance and cost reductions in recent years will address.
This coming October under the government’s YFYS mandate, Christian Super MySuper members will receive an envelope with a letter informing them their fund has not passed muster under the new reforms. This correspondence will also highlight there are other funds that may have better performance outcomes and direct them to the Australian Tax Office’s YourSuper comparison tool.
Based on publicly available APRA performance data it is predicted that about 20 fund executives will be confronting a similar first strike scenario, a potentially debilitating blow considering reputation and member growth are the lifebloods for funds hungry to earn ongoing cost savings through scale and access to investment opportunities leveraging organic inflows.
Piper, who has helmed Christian Super for the past three years and who was previously chief operating officer of World Vision Australia, is determined to address the dubious honour of being part of this group with eyes wide open.
Piper acknowledges the value of reforms targeted at the superannuation industry, but he also recognises that what has now become described as ‘rough justice’ could end some second order benefits Australians saving for their retirement are seeking and what the fund he is in charge of stands for.
Christian Super’s organic growth rate will be the envy of many of its peers, measuring 15 per cent net cash inflows and circa 4-5 per cent positive net member growth each year for the past five years, Piper confirms.
“You’ve got a fund with strong engagement, many people making an active choice to join. And clearly, there’s a brand proposition that is very well suited to a cohort in the Australian market, the community of broad faith, who are making an active choice to join. So that high level of member engagement means that it’s so important that we do whatever we can to try to retain and maintain that,” Piper describes in an interview with Investment Magazine.
Piper estimates the size of Christian Super’s addressable community at around 2.2 million (people who describe themselves as having an active part in a faith-based community and are of working age).
Aside from ethical funds Christian Super is unique in the market given its purpose-built faith-based investment and membership approach.
Runway ‘simply too short’
At the heart of Christian Super’s performance challenges relative to the SAA benchmark lies the fund’s legacy conservative bias within asset classes such as equities and unlisted sectors, a risk-focused dynamic asset allocation overlay program which was developed following observed member switching behaviour during the GFC, a J-curve impact of a recently implemented private equity portfolio, and a portfolio of impact investments which have have gained recognition for their social impact but have underperformed the YFYS benchmarks, a discussion with Rider reveals.
Christian Super has a program in place to recast the investment portfolio which began under Rider’s predecessor Tim Macready and has in the last 12 to 18 months begun to claw back performance gains relative to the SAA benchmark, Rider says. In particular Rider notes these relative gains have come by becoming more benchmark aware within listed sectors, which resulted in some more conservative managers being replaced.
“The work we are doing now is ensuring that the portfolio is well set and fit for purpose in line with member interest as well as [in line with] the changing legislative and regulatory environment. But again, the way you’re cast with the performance test, the runway is simply too short to work out that historic kind of performance,” Rider says.
Pulling apart the SAA listed benchmark and examining the Your Future, Your Super performance tool as well as looking at peers has given Rider and the investment team a good idea of what is driving the performance of those indices and what’s potentially a drag on the relative portfolio returns.
“Historically the fund had a very strong, almost peer agnostic approach to delivering its CPI-plus mandate along with a bias towards capital preservation,” Rider says.
“The [APRA] heatmap and then obviously Your Future, Your Super became very important data points to say that, while we think the thesis might stack up strongly on a long term basis, it may put you at a greater risk of failing one of these points or appearing as a bright red on a heatmap,” he says, describing the “portfolio optimisation” work the fund continues to undertake.
“This improvement hasn’t just started, it was underway before I got here when there was this realisation the fund was lagging its peers and things needed to be done. But it takes a while to turn these things around, particularly when you’re talking about building up the liquid assets in your portfolio,” Rider says.
Although Piper emphasises the fund has at no point made an intentional choice to prioritise the impact or ethical considerations over returns, he acknowledges that being an early mover and pioneer into ethical and impact investing has meant its legacy portfolio has been challenged by the new obligations of the performance test measurement.
At $150 million in size Christian Super’s impact portfolio which includes socially affordable housing and specialist disability accommodation has been a drag on portfolio returns and has continued to challenge the fund’s pivot to new performance measurement even though it’s not major, it remains a relatively significant (7-8 per cent) proportion of the overall portfolio.
Other recent forays and extensions of impact investment allocations by some of the superannuation industry’s larger funds including Australian Super and Aware Super might be significant in dollar terms in comparison to the Christian Super impact portfolio but are fractions rather than percentage points relative to these funds’ broader portfolio.
“It’s difficult because that’s a really important part of our brand proposition and its what makes us distinctive and its consistently one of the reasons that members tell us they want to be with this fund,” Piper outlines.
“But those things may not be fit for purpose in a shorter market cycle or a shorter measurement timeframe so you’ve got to make changes, you’ve got to make adjustments but it’s challenging to turn that around in time,” he says.
APRA was satisfied with progress
In the period before the Your Future, Your Super draft was dropped into the October 2020 Federal Budget and even in the lead up to the subsequent progression of the Bill through parliament, Piper characterises his discussions with APRA as detailed and constructive.
“APRA has been well aware of the work we have been doing to push fees down and we continue to drop these down with three reductions in the last two years with more to come,” Piper reflects.
“Certainly the regulator has regarded as being really important the distinctive position niche funds have that very well targeted to a particular, highly engaged member cohorts,” he comments.
“We’ve never had a sense the prudential regulator wants this part of the market shut down completely but there is no question there has always been a desire for funds to consider consolidation and collaboration,” he says.
“What I suspect one of the outcomes of the performance test will be is the loss of the ability for APRA to apply any degree of appropriate discretion around the good work that trustees may be doing in this regard,” he adds.
There has not been a discussion between Piper and the regulator about whether Christian Super could be better positioned as a ‘choice’ rather than a MySuper product; currently half of the fund’s members are with the fund because of its MySuper status while the other 50 per cent have actively switched to the fund, he highlights.
Time to be propositional
In the spirit of owning the performance benchmark outcome and taking the consequences head on, Piper has used the catalyst not only to reach out and open communication with the fund members and the broader addressable community but also with other funds that might be open to formal collaboration opportunities.
“I think what it does is it certainly sharpens the focus around collaboration, and really thinking about a future state whereby working constructively with a peer fund or peer funds, are there ways that you can continue,” Piper says, alluding to live discussions Christian Super is currently having to merge or enter a formal partnership agreement.
At this stage Piper says Christian Super’s fate relating to the performance test isn’t a roadblock to conversations with peers, although he alludes to not wanting to be in a position where the more binding second strike looms with the portfolio optimisation project and collaboration discussions remaining where they are today.
“We formed a view and our board has formed a view that you don’t want to get to that place and find yourself with your back to the wall and painted into a corner, I think there is a very real and active opportunity now to move ahead,” Piper says.
Despite the external pressures applied by regulation and policy changes Piper wants to prioritise the elements of the fund that are unique and important to members in the hope this will ensure its DNA endures but also so it can have an impact on the composition of the industry in a post YFYS world.
“It is time to be propositional, but we also think that our ability to shape a future that enables us to keep doing what we’re doing becomes potentially compromised the more that time runs,” he says.
“Whilst we’re a smaller fund, what we have is what probably funds 10 or 20 times our size would love which is purpose identity, which is something everyone should be focusing on particularly with the advent of stapling,” Piper says.
“If we are heading to a world where we have 10 mega funds and nothing else I think our sector loses something, I hope that’s not the end state we’re tracking towards.”