'Look for alpha': Hume fires warning shot at index-hugging super funds

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Super funds should continue to invest in illiquid assets, private equity and venture capital under the new regime, she said, pouring cold water over fears the budget measure could see the flow of money from super funds to early-stage technology companies and job-creating infrastructure projects dry up.

By contrast, any trustee that does seek to increase exposure to passive investments in a bid to avoid being branded as an underperformer would be exposed by the government’s incoming online comparison tool, a separate reform item on the cards.

“If you’re an index hugger, what you’ll find is on the YourSuper tool you’ll just be middle dwelling,” she said. “And if you’re going to hug the index, you better do it at a seriously low cost, because that’s what you’re going to be measured on.”

But Justin Arter, chief executive of $54 billion construction industry superannuation fund Cbus, earlier told the Summit he had serious concerns that a push to passive investing could be an “unintended consequence” of the reform.

“We have no argument with removing underperformers from the system,” he said. “As a strong performer, of course, we enjoy a strong reputation.

“But we must safeguard against unintended consequences that impact investment approaches or undermine members’ outcomes and the capacity of funds to make long-term capital allocations.”

Such unintended consequences “could make it harder” for funds such as Cbus “to be active and direct providers of capital into the economy,” he warned.

Mr Arter previously ran the Australian operations of BlackRock, the world’s largest investment manager and a major provider of passive investment services for super funds.

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Insurance tail, super dog

Though she refuted the growing consensus that funds would be encouraged to invest passively, Senator Hume made clear the test would only measure quantitative and not qualitative outcomes.

Lobby groups including the Association of Superannuation Funds of Australia (ASFA) – which represents 200 funds from both sides of the warring super sector – have said this approach will fail to take into account important factors such as insurance, financial advice and customer services and governance and risk management protocols.

“I don’t accept the premise that the insurance tail should wag the super dog at any point in time,” Ms Hume said. “That’s not the primary purpose of superannuation.”

Mr Arter listed the possibility of consumers losing their group insurance benefits as another negative “unintended consequence” of the government’s broader super reform agenda.

“In our unique circumstances, our members because of the hazardous nature of their work have an overarching need to have a very strong [total and permanent disability] insurance product,” Mr Arter said.

The encouragement to pursue active investing strategies also somewhat walks back Senator Hume’s previous indications that the government may not be opposed to the super sector lifting its exposure to low-cost, passive investments, given its alarm at the $30 billion paid each year in fees to the bloated sector.

“We want funds to turn their minds to this,” Senator Hume said in October, when asked by the Financial Services Council if the government was concerned the reform could “drive changes in investment behaviour” and that “index funds might be the big winner”.

“The government’s responsibility is not to create a thriving funds management industry, our responsibility – as the ones requiring Australians to quarantine one in every $10 they earn – is to ensure their best interests are being served. So, yes, it will change some dynamics but the sky is not falling.”