Investment returns of super funds are expected to be hit as appetite to take on performance test risk is diminished due to the Your Future, Your Super performance test according to the latest research published by the Conexus Institute.

The research found super funds are taking a shorter investment time horizon, reducing their portfolio management levers and becoming more constrained in managing risks in order to maintain or build their performance test buffer. “At the end of the day, if more funds are constrained in taking on active risk, then active return expectations will be lower which results in lower returns,” said David Bell, executive director, The Conexus Institute and author of the report titled “Assessing the impact of YFYS through interviews with CIOs of funds with performance buffer”.

Bell conducted confidential interviews with the chief investment officers of 10 super funds, which had performed well against the test. While all interviewees supported a performance test to protect consumers, most agreed a purely benchmark-based approach was flawed and returns were expected to be affected over the medium to long term.

The performance test came into effect in July 2021 as part of the Morrison government’s reforms of the superannuation industry. Funds that underperformed their tailored investment benchmark by 0.5 per cent would fail the test. Most of the 13 funds that failed last year’s test have either folded or are in merger talks with other super funds.

The report found the industry’s concentration on passing the test will leave a sizable portion of the industry in “limp mode”, which is where a fund, with little performance test buffer, has to significantly reduce performance test tracking error.

However, this creates a conundrum whereby a fund can only build up buffer by having more risk in their portfolio. “Few funds will fail the test going forward as they are so focused on the test,” said Bell. “They will take less risk in order to maintain the performance test buffer but they also need to take on more risk in order to build up the buffer.”


The report found the performance test had shortened the investment timeframes of a number of CIOs as they were focused on managing the risk of the fund going into limp mode.

“Longer [time] horizon investing was a real advantage but YFYS takes that away,” one CIO was quoted while another one said “are we genuine long-term investors? No more”.

CIOs were also finding fewer investment opportunities they could apply at scale due to the performance test risk profile of these investment classes including inflation-linked bonds, public equities, alternatives such as insurance-linked strategies, hedge funds and alternative risk premia and private assets.

This more performance test aware approach has resulted in portfolio changes such as reducing exposure in emerging markets. “YFYS is not just a measurement exercise,” said one CIO. “It is changing the way that funds invest.”

Super funds’ participation in unlisted property and infrastructure projects going forward is another asset class affected by the test according to another CIO. “The ability of the industry to participate in PPPs and national building-style transactions is hampered if those deals aren’t necessarily part of the benchmarks.”

Constraints in managing risk was another emerging consequence of the performance test as well as managing socially responsible options and climate risks. “We are trapped between meeting the stated demands of our members or risk being on the front page of the mainstream newspapers,” said another report participant.

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