APRA’s heatmap risks stifling innovation and reducing diversification which would have a harmful effect on member outcomes in the event of a complete market meltdown.
This is the view of Christian Super chief executive, Ross Piper, who highlighted the risk of herding where super funds’ allocation all look the same. He said the prudential regulator’s tool to weed out under-performing funds could result in investment professionals becoming overly peer sensitive because no one will want to risk becoming an outlier in the industry.
Piper is worried that heatmap provide an incentive for funds to build portfolios to beat peers rather than a focus on achieving long term investment objectives. “With the emergence of a very narrow set of mega funds, it is harder to see that member choice being fulfilled,” he said. “If you look at a long running bull market, invariably that might see funds taking a high level of risk and a correction would obviously have negative impact for a number of members.”
APRA has warned it would forcibly remove trustees of underperforming funds thanks to the results of the heatmap. The graduating colour scheme changes from white to red, with the darker colours indicating the furthest away from the trend line. It also separately measures fees and costs and sustainability of member outcomes.
Christian Super, like many other funds, has historically been more defensively positioned with a focus on capital preservation. Piper said the faith-based superannuation fund has a long-term investment strategy that has been able to deliver on its return targets in all market cycles.
“Ensuring an appropriate balance of downside protection of our members capital, alongside exposure to growth opportunities is a core part of our strategy and we firmly believe this is aligned with the long-term interests of our members,” he said.
Piper acknowledged that the $1.6 billion superannuation fund was called out by APRA on both fees and investment performance. Of the MySuper products that flash dark red on the regulator’s gradient colour scheme, Christian Super had a net investment return relative to APRA’s simple reference portfolio of minus 0.84 per cent.
“In a lengthy bull run, we are going to lag funds with higher portfolio risk, and the challenge is you need to have sufficient scope in the system to enable different funds to implement a different range of investment strategies that are appropriate for all market cycles and member demographics,” he added.
However, he also said that the fund’s investment performance targets were based on CPI-linked objectives.
Piper stressed the importance of member choice and ensuring healthy market competition. “In the case of our fund, we have highly engaged members who want us to invest their money in a way that doesn’t compromise their values or beliefs, whilst still achieving strong risk adjusted returns and stated investment objectives for their long term benefit. We are absolutely focused on delivering on this.”
The Christian Super head said the fund had already reduced fees earlier this year and intends to maintain a strong focus on making sure they remain competitive. The fund, he said, continued to grow strongly and is a recognised leader in responsible investment.
He called APRA’s initiative to improve transparency and comparability between funds, positive. “The data and its interpretation are not perfect, particularly regarding asset classification in some aspects of our portfolio” he said.
“Our portfolio looks quite different to many other funds, but is consistently delivering on its risk/return targets.
He added that the other limitation of the dashboard is that is does not sufficiently consider differences in demographics, age or risk profiles across different fund members. “Different funds should have different investment strategies related to member cohorts, member demographics, risk profile, age and a challenge for the heatmap is that some of those unique member characteristics might not be accurately reflected in the tool itself.”
“Our portfolio looks quite different to many other funds, but is consistently delivering on its risk/return targets.” Meanwhile, Laura Wright, chief executive of the $12 billion NGS Super said some of the consequences from the heatmap – like herding – have already happened. Asked whether heatmap will exacerbate peer awareness so that all funds behave the same way, she said that too had already occurred.
Consequently, Wright doubted whether the results would influence a funds’ investment approach too much given they have used peer comparisons like Super Ratings or Chant West for the 24 years she had worked in the industry.
She added that funds had questioned whether such tools compare apples to apples and whether the system can be gamed. “Whether APRA’s comparison tool, which aims to pressure on poor performing smaller funds, is the right tool is another matter,” she said.
Wright said while some funds clearly had fee issues and sustainability issues, there were several well performing funds which were coloured by the heatmap when compared to APRA’s simple reference portfolio.
The NGS head also said the Productivity Commission’s proposed “best-in-show” shortlist of 10 top default funds had also occurred, she said noting that that money was still flowing from the retail funds and moving to the top ten performers which included Australian Super, Hostplus, SunSuper and First State Super.
NGS’s heatmap was mostly white except for a light yellow to amber on total fees for balances of $25,000 or above. “This was no surprise and was being addressed with our investment fees reduced earlier this month.”