The Your Future, Your Super reforms will put super funds in a “greater bind” than investors or the government realise, according to Advance Human Solutions.
The reforms will see funds required to provide greater transparency around how they spend member money and performance, with underperforming funds required to inform members of their shortcomings.
“Unfortunately, these funds are monitored and rated by agencies that score ‘team stability’ very highly and one of the unintended consequences is these funds carry underperforming investment team members longer than they should rather than risk losing star-ratings,” said Alexandra White, managing director and founder of Advance Human Solutions.
Ms White believes that there are two factors to consider in fund performance – marketplace and manager skill. But benchmarking will only require a fund to identify when skill has been the cause of underperformance.
“There is definitely a challenge for fund managers when it comes to the ‘perception management’ of investment team performance,” Ms White said.
“The exacting nature of investment ratings often handcuffs the manager to sustain a rating lest they lose investors and inflows”.
Australian Super suffered an “embarrassing” ratings downgrade because they failed to reveal details of high staff turnover and the performance of their internal investment team to Lonsec, resulting in the ratings agency taking the fund from “recommend” down to “investment grade”.
“While at times brutal, markets can also be fluid and forgiving places and once underperformance is remedied investors and ratings agencies can settle,” Ms White said.
“However, the stars do take a lot longer to re-appear than they should.”