Treasury floats performance test for SMA - but it won't work

It’s a nice idea, if you’re in Treasury, to think that by simply imposing a performance test you could  “increase competitive pressure on (platform) trustees to deliver strong long-term returns and value for money” [1] from products like SMAs.

This government seems to have a “Su dinero es mi dinero[2]” attitude to superannuation – why don’t we just pressure the industry funds to back build-to-rent or net zero – but the idea that you can regulate them into enforcing good performance seems a stretch too far.

What they propose is that trustees of superannuation platforms would be held accountable for the performance of SMAs (and every managed investment scheme on their APL) under an extended performance test.

Under the current test if a product falls 0.5% below the benchmark in its annual returns over a period (10 years) the issuer (SMA Responsible Entity, the platform in many cases) would write to investors and inform them, and “encourages (them) to consider switching”.

Products that fail the test a second consecutive year are prohibited from accepting new investors.

[1] Treasury Strengthening the superannuation performance test” May 2026 Consultation Paper p 24
[2] Your money is my money – like “mi casa es su casa”, but different

By Toby Potter IMAP Chair

Investment Trends research shows that SMAs are generally only part of an overall portfolio. Imposing a performance test with such terminal outcomes (inevitably poorly understood) has the potential to undermine the trust of a client in their adviser.

The consultation paper doesn’t discuss the role of advisers in selecting products to recommend, and their obligations to monitor and advise on ongoing performance.

What are other issues that arise from extending this to SMAs offered through superannuation?

• Won’t stop a recurrence of Shield / First Guardian:
  This appears to have involved fraud or at least inappropriate advice – so a performance test isn’t the answer. And, since every new fund is deemed to pass for the first 7 years, Shield and First Guardian wouldn’t have been stopped.
• A single benchmark for all SMAs in a peer group:
  Many SMAs have a CPI + benchmark, others have well constructed composites. So how will they be integrated into a regime based on a single YFYS type benchmark? In addition, the consultation paper refers elsewhere to problems the YFYS performance test is already having with private markets. A standardised benchmark is likely to create “Same Same” portfolios to manage portfolio manager’s risk.
• Defining peer groups:
  Advisers recommend SMAs that meet a client’s specific circumstances. With YFYS there’s one peer group. With SMAs there could be dozens. The problem of who then sets the benchmark for each would be extraordinarily difficult.

• A ten year time frame for the YFYS performance test:
  This means that it’s not a “today problem” for new SMAs, so to be effective the time frame will be reset to say a 3 year period and since failing the test is existential, this means only index based, benchmark hugging SMAs will be available in super. Otherwise, see the Shield / FG issue above.
• Ability to take active asset allocation positions:
  It’s extremely unusual (risky) that ~40% of the S&P500 - a core component of global equity exposure - is concentrated in 10 stocks. A manager who believed this represented an undue risk for investors (as many reputable global equity managers do) would be unwilling to reduce this exposure in case these stocks continued to rise. Remember, “The market can stay irrational longer than you can stay solvent” ^[1]
• Encouraging behaviour that avoids the performance test:
  More SMSFs, more “wholesalisation” of the investor base, more direct stock picking, more inefficiency by avoiding SMAs and sticking with “Adviser as Portfolio Manager”, product proliferation to avoid a 10 year trap. All these make the 2 bp cost of Shield pale into insignificance.

^[1] John Maynard Keynes

• Variance in reporting:
  As the paper notes, there can be variance in reporting methodology between platforms. An SMA model might fail in one platform and pass in others. Try explaining that to a client.
• Cost of compliance:
  All this oversight comes at a cost. Let’s say it’s only 5bp of explicit (platform costs) and implicit (internal adviser costs). On a $200bn SMA pool of assets that’s $100m per year cost borne by investors
• Platform stranglehold:
  The pressure on platforms to adopt a conservative approach to product continuance – a life and death “two strikes” policy – creates a tension in the advice delivery chain with unknown consequences.
• Closure costs:
  Say an SMA has fallen short two years in a row and cannot accept new investors. Would the platform have a commercial imperative to close it, thus forcing buy / sell costs and crystallisation of CGT onto existing investors? Are anyone’s interests being served here?
• What about market forces?:
  We regularly see advisers switching products or managers shutting the doors because performance wasn’t there and they didn’t get supported. As a way of managing underperformance, it works.