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YFYS performance test guilty of extinguishing ‘best ideas’, researcher finds

4 minute read

While funds managed to avoid the worst of the recent volatility, a research house has argued that their performance could have been far better had it not been for the YFYS test.

Super funds passed FY22 with “flying colours”, according to research house Chant West, with diversification providing a cushion from significant market declines.

While the median fund lost 3.3 per cent over the period, Chant West senior investment research manager, Mano Mohankumar, said this should be considered a success given every listed market in traditional asset sectors, other than cash, had fallen significantly.

“Indeed, the only meaningful positive return among all the public market sectors we measure came from global infrastructure,” he noted.


However, despite Chant West’s positive assessment of the performance of super funds during a challenging financial year, the firm believes as a collective, they could have done better.

“That’s because some funds were inevitably influenced by having one eye on passing the annual performance test imposed by the Your Future, Your Super regime. The test has interfered with funds’ proper focus as long-term investors,” Mr Mohankumar said.

“It has shortened their time horizon and introduced tracking error risk to the equation, meaning that some funds have had to make compromises so as not to stray too far from the test benchmarks for fear of failing the test (this was especially the case for those funds not far off failing the test).”

Chant West blamed the test for a lack of great ideas among funds.

The researcher found that in fear of the test, one super fund actually wound back its exposure to commodities just before the sector produced notably strong returns. 

“There has also been some pulling back from the search for new sources of return or pausing the implementation of high-conviction ideas in light of the performance test,” Mr Mohankumar added.

“This is all to the detriment of members and represents an unintended (though predictable) consequence of the test regime which, while well-meaning, is flawed and in urgent need of refinement.”

For FY22, private equity was highlighted as the outstanding performer with a gain of 24.2 per cent, followed by unlisted property (14.1 per cent) and unlisted infrastructure (12.7 per cent). 

Mr Mohankumar suggested that exposure to these sectors was the main factor driving the performance of the more successful super funds over the financial year.

“It is unprecedented – at least in the past 30 years – to see negative returns in the same financial year from Australian and international shares,” he said.

“Australian and international listed property, and Australian and international bonds. And these were not marginal falls — they were substantial losses of about 7 per cent to 12 per cent.

“When we contrast those losses with the strong positive returns from unlisted sectors, we can clearly see the benefits of diversification.”

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.