Active Equities and Performance Test in Superannuation

This technical report discusses the role of equities in meeting the performance test requirements of the Your Future Your Super (YFYS) legislation. It outlines how the performance test has shifted the focus of super funds towards constructing equity portfolios that consistently deliver risk-controlled alpha at low fees. The report emphasizes the importance of the information ratio, which measures active return per unit of active risk, as a key determinant of success in surpassing YFYS benchmark returns. It details strategies for maximizing the information ratio, including improving manager skill and increasing the breadth of investment opportunities. The report also highlights the significance of managing costs, tax implications, and outcome risks, particularly concerning ESG exposure. By diversifying investment styles and focusing on effective portfolio management, super funds can enhance their chances of passing the performance test while aiming for consistent returns. The changing landscape of equity management in light of the performance test is also addressed.