TWUSUPER, a superannuation fund focused on Australian transport workers, has reconfigured its A$6.2 billion ($4.3 billion) portfolio to better compete in an environment where regulators are pressing smaller funds to prove they can go toe-to-toe with their bigger brethren in providing good retirement outcomes.
The Melbourne-based fund's MySuper default option passed a newly mandated annual performance test last year by a whisker, trailing benchmark returns for its strategic asset allocations by an annualized 47 basis points in a system where minus 50 basis points or lower is a failing grade. While a number of the funds that did fail last year have been merged into bigger funds in line with long-standing regulatory pressures, TWUSUPER shows no signs of moving in that direction.
Over the past year or two, the super fund has worked to cut external manager fees, made its first significant allocations to passive strategies and focused its active management budget on capacity-constrained segments such as small-cap and microcap equities, said Edward Smith, TWUSUPER's chief investment officer.
Elsewhere, the fund has boosted allocations to inflation-resilient real assets, including unlisted infrastructure and property, and most recently moved to reduce a long-held underweight to duration as bond yields rebounded from historic lows.
In the wake of last year's "Your Future, Your Super" reforms, including the annual performance test that carries severe consequences for funds that fall short, "it's not a simple world of risk and returns anymore," Mr. Smith said in a June 20 interview.
By way of example, TWUSUPER had previously been able to maintain a relatively conservative asset allocation, sacrificing some returns during bull market rallies in line with a median age of 47 for the fund's 104,000 participants — a decade older than funds with younger demographics, such as Melbourne-based Hostplus, the A$68 billion fund focused on employees in Australia's tourism and hospitality sectors.
Now, however, "we get penalized for that when the main metric used by the regulator is benchmark relative," Mr. Smith said, making peer-relative performance critical and benchmark-relative performance absolutely critical.
That mix of regulatory and competitive pressures — participants can walk if returns aren't as good as they can get elsewhere — requires a multidimensional approach to risk that looks to optimize several different things all at the same time, he said.
According to Australian Prudential Regulation Authority statistics, TWUSUPER's balanced default offering delivered an annualized return of 8.01% for the seven years ended June 30, 2021.
Performance leaders such as Hostplus and AustralianSuper, the industry's biggest fund with A$261 billion in retirement assets, both of Melbourne, posted respective gains over that period of 9.5% and 9.65%.