The superannuation industry is returning to an era where ‘inflation-plus’ objectives are harder to achieve, and this may require the revision of long-standing investment targets, said industry figures in a panel discussion at Conexus Financial’s Fiduciary Investors Symposium, held in Sydney’s Blue Mountains region.
But communicating this to members will be no easy feat, they said, as lowering a fund’s target below those of some peers is not a good look.
In a panel session exploring whether investment objectives need to be revised in a high inflation environment, Rest CIO Andrew Lill said that for a long period up until around 2000, achieving inflation plus 3 to 5 per cent was a “realistic and really good outcome” for a diversified 60/40 portfolio.
But in the past 20 years with rates and inflation low, “many of us have forgotten the idea of beating an inflation-plus target, because it was just sort of assumed to be simple”, Lill said.
Since then, the industry has moved to other standards such as peer-relative comparisons, or ensuring alpha generated from active management is sufficient to justify the fees. But now the industry is returning to an era “where achieving inflation-plus-four is going to be a really tough target”, Lill said.
“It’s going to be a target that we need to put a lot of energy and focus on, and if we achieve it, we should feel really good about what we’ve done for our members,” Lill said.
Session chair David Bell, executive director at the Conexus Institute, asked if funds should adjust their targets down to more realistic levels.
Lill said if the targets are real, funds should be prepared to change them. But in reality “there isn’t that much tolerance for changing your objectives every two or three years depending on your views of the future environment”, and some funds fear this would be “illustrating to our members that we might not be as good as those guys over there who have kept their objectives high.”
“CPI plus whatever the right number” remains a good objective for accumulation and high growth assets, but is not relevant for capital-protective funds for risk-averse investors or those transitioning into retirement, he said.
In audience discussions, Ian Fryer, general manager at research firm ChantWest, said with funds worried about reducing their targets when their peers were not, there was an important discussion for the industry to have about what these targets really mean. “Do we just assume we’re not going to meet them?” Fryer said. “That’s probably not good enough.”
Table discussions also revealed a widely-held view that CPI-plus is not language that members typically use, and engaging with members will typically involve explaining the superannuation journey in more accessible terms.
Panellist Debbie Alliston, investment board committee member at Active Super, noted that while some targets are unpredictable due to the way markets work, there are a range of assets that can be “tailored and designed to specifically deliver an inflation-based outcome”, and these can make up a significant portion of the portfolio.
They include inflationary bonds, infrastructure or property assets where underlying revenues can be negotiated to be tied to inflation, and some alternatives that can be targeted to deliver an inflation-plus outcome.
Stewart Brentnall, CIO at NSW TCorp, said the reality is most retirement objectives are tied to inflation, whether members state that clearly or not.
“The objective is CPI, plus,” Brentnall said. “It’s strongly implied. So there’s debate about what the plus number is, but it is almost certainly inflation-based. And I challenge anyone to toss that out, and say well actually my objective is something else, because I don’t think it is.”
