Tim Unger and David Bell

The binary outcome of the Your Future, Your Super (YFYS) performance test has created unintended issues for advisers to consider, as it doesn’t give a clear indication if it is actually in the best interest of a client to move out of an underperforming fund.

If a superannuation fund failed the performance test, it has the potential to breach the best interest duty if an adviser hasn’t flagged the news with the relevant client.

Speaking at the Professional Planner Researcher Forum, Morningstar manager ratings director Annika Bradley said from an adviser perspective there are a few elements that complicate matters.

“The fact it doesn’t consider asset allocation, risk-adjusted factors and it’s completely backwards looking. There’s a few things for them to get their heads around in terms of how that performance test works versus how they’ve thought about assessing investments through the lens of best interest duty.”

Bradley compared the forward-looking approach Morningstar used to rate funds which differs to the backwards-looking YFYS performance test.

“In terms of what Morningstar does on the qualitative side – the gold, silver and bronze ratings – it’s forward-looking, it takes into account the people and process and it doesn’t take into consideration historical performance. The quantitative rating does, but it also takes into account risk adjustment which the performance test doesn’t.”

For example, Bradley highlighted if a poor-performing fund brought on a better CIO, the YFYS performance test wouldn’t recognise the change but Morningstar’s process would.

For the funds, Willis Towers Watson senior investment consultant Tim Unger said it’s difficult to manage a portfolio to two different return objectives.

“Super funds have a CPI plus return objective, but now they have to also manage a relative return objective. While YFYS does have a seven- or eight-year horizon where you’re measuring performance, the reality is there is a rolling annual assessment.”

That rolling assessment effectively means the time horizon over which trustees and investment teams assess their performance is shorter.

“There will be super funds giving up that long-term return premium because they’re having to shorten their timeframe and manage relative returns of the YFYS benchmark.”

Banked performance

Session chair David Bell of the Conexus Institute argued high-performing super funds are at an advantage and could have “banked performance”.

AustralianSuper head of Australian equities Shaun Manuell countered the sentiment as the fund is not “sitting back and resting on our laurels”.