Wall St’s bull run has caused an Aussie superannuation headache, says AMP

The bull run in US sharemarkets is creating ‘tracking errors’ in the Your Future, Your Super performance tests, says AMP’s chief investment officer.

AMP chief investment officer Anna Shelly. Picture: Stuart McEvoy

The bull run in US sharemarkets, driven by the potential opportunities in artificial intelligence is creating “tracking errors” in Your Future, Your Super performance tests, AMP chief investment officer Anna Shelly says.

Ms Shelley, who manages some $120bn in funds, said super fund investments in private equity were benchmarked against global sharemarkets in the Your Future, Your Super performance tests administered by the Australian Prudential Regulation Authority.

But she said the factors behind the performance of those investments were very different to those behind the recent surge in the US markets, which had been driven by the “Magnificent Seven” US tech stocks – Nvidia, Amazon, Apple, Alphabet, Meta, Microsoft and Tesla.

“Under the tests which APRA administers, private equity investments are measured against global equities,” she said.

“The returns (in the US markets) are being driven by just seven tech companies, but the private equity investments don’t own those seven tech companies.

“It creates a huge tracking error against the test and a huge amount of volatility from year to year.

Mark Zuckerberg, the head of Facebook parent company Meta.

“We’re not the only one in that position,” she said.

She said AMP’s private equity investments included a successful pet business, whose performance had nothing to do with the forces behind the US tech stocks.

Ms Shelley’s comment about the shortcomings of the Your Future, Your Super performance tests is the latest is a series of concerns about the unintended consequences of the Your Future, Your Super performance test regime, which came into force for the default MySuper products in July 2021 and was expanded to cover Choice products from July 2023.

The tests were introduced to weed out underperforming funds.

Funds have raised concerns that the benchmarks make no provision for investment strategies such as backing the energy transition, where investments can take longer to generate returns.

The federal government agreed to some modifications of the benchmarks last year following complaints from the sector.

Ms Shelley said using global equities as the benchmark for private equity investments was “appropriate over five to 10 years”.

But she said volatility in global sharemarkets, including the recent run in the US market, made the benchmark a problematic comparison tool in the short term.

While global markets were changing constantly, valuations of private equity investments were made far less frequently, adding to the difficulty of short-term comparisons.

“At AMP we think there are a number of other improvements the government could make to the performance test,” she said.

She said there was no provision for comparisons in pre-retirement products, where people nearing retirement might want to shift to a more conservative investment strategy.

She said there were other products offered by super funds that were “ill-served” by the current performance tests.

“ESG is another one,” she said.

“If the government is keen for us all to invest our portfolios more in line with carbon emissions, the current performance test does not accommodate that at all.”

In submissions made to the federal Treasury last month, super funds argued strongly against the expansion of the performance test regime to products for retirees, who can have widely differing personal circumstances.

Ms Shelley said the strong performance of global sharemarkets was behind the returns produced for the 2023 calendar year.

These included 11.6 per cent for members of its MySuper balanced growth superannuation fund option for members born in the 1970s, the largest of its funds.

Microsoft is one of the so-called “Magnificent Seven” US tech stocks. Picture: AFP

MySuper members born in the 1980s and 1990s, with exposure to a higher growth asset allocation, saw returns of 11.8 per cent for the year.

“We are seeing the potential benefits and enthusiasm for artificial intelligence and the benefits it might bring being expressed in the tech sector and the broader market,” she said.

But she said that there were “some elements of frothiness” in the market at the moment.

“I am a bit concerned about this perhaps excessive enthusiasm for the top tech companies,” Ms Shelley said.

“The way it has skewed the market is a little concerning.

“As always, when there are big technological advancements, it can be very hard to pick the winners at the beginning of the ­process.

“We have seen in the past that it’s the picks and shovels which often end up doing the best, as opposed to the poster children.”

Ms Shelley said global markets were also taking a view on the potential efficiency benefits from artificial intelligence for companies across the board.

She said stronger than expected performances in sharemarkets were also being driven by easing concerns about the potential for a recession in the wake of rising interest rates.

“When you look at how robust both the Australian and the US economies have been, we have seen forecasts of recession pared back,” she said.

“Economies have been surprisingly resilient, and inflation has trended down.”

Ms Shelley said the investment managers used by AMP had a range of views.

Some were enthusiastic about Nvidia, while there were “some who are more concerned about valuations”.

Ms Shelley said AMP was not making any major changes to its asset allocation strategy but was looking at more investments over time in unlisted assets such as infrastructure, private debt and private credit.