The controversial ‘Your Super, Your Future’ (YSYF) reforms introduced in Australia last year would’ve weeded out the worst-performers and lifted system-wide returns by up to 0.3 per cent over a decade if applied across the global pension fund universe, a new study has found.
According to the analysis by CEM Benchmarking, the YSYF approach offered an effective method of screening consistently poor-performing global funds when back-tested over an almost 30-year period to the end of 2020.
The YSYF regime ranks Australian default super funds based on seven-year investment returns and one-year costs (including tax) with those that fail the annual test twice in a row banned from accepting new members – and likely forced to merge with another fund.
As of July this year the YSYF standards will expand to the wider Australian super market.
CEM found an average of about 14 per cent of funds in its global database failed the seven-year YSYF test in any one year, with the proportion falling to 12 per cent over eight-year performance timeframes.
The study also revealed that almost 80 per cent of funds that failed a seven-year test were likely to miss the cut over the following 12-month period.
“Removing investors that fail consecutive 7-year and 8-year tests would have improved future net value added across the remaining funds from 0.22% to 0.30% over the past decade (2011-2020),” the CEM report says.
Furthermore, funds more prone to failure tend to share common features including relatively smaller size, a greater degree of investment outsourcing and higher costs.
But in some bad news for those who exclusively favour passive investment styles, the CEM study also found actively managed schemes tended to perform better overall in the YSYF back-test.
“Nearly all investors who contribute to the CEM database are, for the most part, actively managed, but those with more actively managed assets in fact pass the YFYS test on a more consistent basis,” the report says. “And so what really matters is not solely cost, since active management is more expensive than passive management, but value for money.”
However, the active management endorsement comes with a caveat.
“Net value added – beating a benchmark – is not the most important feature of asset management, but it is an important one,” the CEM paper says. “If you pay for active management, then achieving positive net value added is a must. If this cannot be reliably achieved, passively investing in your strategic asset allocation is a better approach.”
Regulators in several jurisdictions including the UK and NZ are currently grappling with investment and pension fund value-for-money metrics but the YSYF reforms are among the most aggressive regulatory interventions of recent times.
“The package marked one of the largest shake-ups to Australia’s superannuation system in decades and it was designed to address a number of structural issues with the existing system by affording greater protection to superannuation account holders,” the CEM report says. “Our research has found that YFYS test, over the long term, is likely to contribute to improvement in system-wide performance. It has also highlighted the characteristics of funds that tend to perform well (and less well). However, just like any test that could be used, it is not perfect, and there are ways it can be improved.”
The study names CEM staffers Alexander Beath, Mike Heale and Maaike van Bragt as authors.
CEM provides performance and value-for-money benchmarking services to institutional investors across the world including an annual assessment for the almost $54 billion NZ Superannuation Fund.