Beyond the Benchmark: Rethinking How We Measure Investment Success

Traditional benchmarks have long shaped how performance is measured, but is that framework still fit for purpose? In today’s fast-evolving investment landscape, benchmarking against legacy indices may hinder innovation, limit exposure to future-forward themes and penalise sustainability-led strategies. This round table gathered leaders from super funds, asset managers, consultants, independent trustees and industry associations to evaluate the role of investment benchmarks in a more dynamic, disruptive world.

Last month, Morningstar convened the fifth of an ongoing series of superannuation-focused round tables – this one centred around measuring investment success, with executives representing $1.8 trillion FUMAS. This discussion occurred following recent publication of the results of the 2025 APRA Your Future Your Super performance test and the Federal government’s announced intention to review the test.

Communicating super performance test outcomes to members

The APRA performance test is an important regulatory requirement but not considered a primary focus in communication with members. The test’s 10-year horizon means results tend to be stable and most funds reported strong outcomes over that period. Shorter-term performance can appear more variable, particularly where private equity allocations are benchmarked against listed equities. Periods of strong public market returns can temporarily make private equity appear to lag, though long-term expectations remain positive. Internally, this dynamic is monitored closely, with an emphasis on understanding performance drivers, managing active risk and ensuring trustees are kept well informed to avoid surprises.

One dominant strategy among many large super funds is the emphasis on long-term investment horizons, particularly in infrastructure. These assets are economically durable and capable of generating stable, inflation-linked returns over extended periods. Many funds were early participants in major privatisations, such as airports and utilities and continue to hold those assets today. This legacy reflects a strong conviction in the long-term value of real assets, particularly where cash flows are predictable and governance rights are strong.

Externally, member communication is centred less on the mechanics of the performance test and more on overall returns, fees, market conditions and retirement outcomes. Many funds prefer to emphasise long-term performance, diversification and resilience during volatile periods. While some member bases are highly engaged, attending in-person sessions and posing questions on topics ranging from crypto to ESG, others require more proactive outreach. To address this, funds are investing in varied communication channels, including adviser networks, digital content, podcasts and social media, to reach both older and younger cohorts.

Across the sector, the consistent observation is that members do not seek details on the APRA test itself. Their primary concerns remain whether their savings are growing, how markets are performing and how competitive their fund is relative to peers. The overarching communication goal is therefore to keep members informed, confident and focused on long-term investment outcomes rather than regulatory metrics.

Impact of performance test on pursuing innovative and diversifying assets

The performance test benchmarks do not fundamentally restrict capital allocation choices provided a fund already operates with a strong investment discipline and maintains a sufficient performance buffer. New investments must demonstrate robust long-term return potential regardless of the test and the benchmark framework simply adds another lens to the scrutiny already applied. Alternative assets such as private equity or liquid alternatives are still pursued where there is high conviction they can outperform over a decade; if they cannot, they would not be appropriate investments even in the absence of the test.

For funds with a comfortable buffer, the test does not materially influence decision-making. These funds retain the flexibility to take active risk where evidence supports it, while neutralising exposures where conviction is low. The performance test remains present as a business risk, but it does not drive day-to-day allocation choices. For many, disciplined benchmarking and risk-management structures were in place long before the test’s introduction, meaning the regulatory framework aligns closely with existing internal processes.

The dynamic is markedly different for funds closer to the failure threshold. Because failing the test has severe and immediate consequences, these funds may become more conservative, reducing tracking error or avoiding strategies that introduce short-term uncertainty, even if such strategies could deliver higher long-term returns. This can create a “doom loop,” where the need to rebuild performance is undermined by the reluctance to take the active risks needed to achieve it. Some funds close to the line may instead take targeted active bets to replace years of strong performance that are soon to roll off, highlighting the high stakes tied to the test’s rolling horizon.

Unintended consequences persist. The test’s definition of risk does not always align with member outcomes, particularly for specialised or values-based investment options such as sustainable or faith-aligned portfolios that may not fit neatly within standard benchmark structures. In some cases, these products face pressure to merge or close for regulatory rather than investment reasons, limiting member choice. This has prompted calls for refinement to better reflect diverse member needs and long-term retirement outcomes.

Handling investment portfolio mergers arising from industry consolidation

Industry consolidation driven by the performance test has not created major difficulties for portfolio managers, although the nature of the challenges varies depending on the type of assets being integrated. Mergers between funds of comparable size and capability inevitably involve complexities such as aligning processes, systems and investment approaches, but these are viewed as normal merger issues rather than consequences of the performance test itself. Where product suites remain separate during transition, performance-related stitching problems can be avoided until a deliberate long-term solution is chosen.

Public market assets typically pose few difficulties during a merger because they can be readily bought, sold, or restructured to fit the receiving fund’s strategy. The situation is more complex for private market portfolios. These assets cannot be easily exited, may have been acquired at valuations or under strategies the receiving fund would not have pursued and can influence future performance even if they do not affect historical results. Accepting these exposures is an inherent risk in merging with a fund that has underperforming or ill-fitting unlisted assets.

Robust due diligence is critical. Both sides of any merger assess the asset base to ensure the transaction is in members’ best interests and mature integration processes can help smooth the transition. In some cases, mergers have even delivered positive unintended consequences, such as opportunities to combine strengths, adopt improved processes, or introduce innovations that neither organisation would have developed independently.

Expectations of the government review of the performance test

Small adjustments to the performance test are considered insufficient and that more substantive reform is needed. Continuous incremental tweaking creates uncertainty, so a comprehensive review is viewed as necessary. The central theme was ensuring the test aligns with long-term member outcomes, preserves investment choice and avoids unintended constraints on capital allocation.

Calls remain for a more holistic framework that considers total risk-adjusted returns rather than narrow benchmark comparisons. There is support for introducing regular review mechanisms and allowing alternative benchmarks where current ones do not represent certain asset classes, particularly renewables, housing and infrastructure — areas the government is encouraging funds to support. Extending tax relief to remove barriers to consolidation was also noted.

A major concern is that the current test creates perverse outcomes for members seeking sustainable or value-aligned options. Because these strategies often deviate from standard indices, they can increase tracking error and volatility, making it difficult for funds to offer them under a single benchmark system. Many prefer a member-focused model, such as a CPI-plus standard, which aligns more closely with how members understand and evaluate their returns.

Can the existing test support broader national investment priorities? Many noted that the main barrier is often the quality of available investments, not the test itself, as some opportunities in these priority sectors simply do not meet required return thresholds.

A commonly proposed reform was shifting responsibility for benchmark selection to product providers, subject to regulatory approval. This would ensure benchmarks better match product objectives and maintain genuine member choice while avoiding concentration risks created by a fixed benchmark list.

The merits and pitfalls of a decumulation performance test

Creating a performance test for retirement products is widely seen as extremely challenging and potentially unworkable if modelled on the accumulation test. Unlike accumulation, where members share a common goal of wealth building within defined risk profiles, retirement members have highly individualised circumstances. Spending needs, drawdown patterns and the timing and size of major expenses, particularly health and aged-care costs, vary significantly, creating a “cohort of one” problem. Applying a single benchmark risks unintended consequences and poor member outcomes.

Financial advice is considered essential. Retirement solutions must allow advisers to tailor combinations of products to each member’s specific circumstances. Defined benefit schemes illustrate the difficulty of applying uniform benchmarks: long-term asset–liability matching, liquidity requirements and distribution obligations make benchmarked tests unsuitable without risking distortions or perverse incentives.

Longevity products and annuities pose additional complications due to capital requirements and guarantees, which prevent straightforward benchmarking. While measuring underlying investment returns may be feasible for some retirement products, no single approach can account for the diversity of member needs, product types, or drawdown strategies. Treasury’s emerging focus on member cohorting, data collection and longevity solutions may further complicate regulatory design.

Benchmark mismatches for listed and unlisted asset classes

Concerns about tracking error and benchmark constraints are seen as manageable rather than prohibitive. Emerging sectors, sustainability-led strategies and thematic long-duration investments are evaluated primarily on their intrinsic merit rather than strict benchmark alignment. Historical experience shows that once-novel sectors, such as infrastructure, can become mainstream over time, reinforcing confidence in pursuing high-conviction investments even if they initially sit outside standard benchmarks.

For private assets, unlisted investments are often compared to listed proxies, creating performance and valuation mismatches. While benchmarks provide oversight and regulatory compliance, investment teams focus on deal-level assessment, emphasizing expected returns, risk and portfolio fit rather than relative performance to a benchmark. Portfolio completion strategies are used to bridge temporary gaps: internal teams identify the appropriate subset of a benchmark and purchase complementary stocks or instruments to “complete” the portfolio. This approach allows targeted risk management and exposure allocation without incurring prohibitive costs from fully customizing benchmarks for each investment.

Investment governance ensures rigorous valuation and oversight and evolving benchmarks, particularly for infrastructure and private credit, are recognized as necessary for better reporting and transparency. Risk management is deliberate and concentrated where conviction is high, with the flexibility to overlay strategies or enhance exposure at the whole-of-fund level. Overall, investment philosophy prioritizes long-term outcomes, member value and conviction-driven deployment, rather than short-term benchmark conformity, with benchmarks serving primarily as a tool for regulatory compliance, oversight and portfolio completion.

Structural shortcomings and opportunities for evolving traditional indices

Traditional indices face structural shortcomings including geographic and sectoral biases, market-cap concentration and limited flexibility for customisation. Many global equity indices are dominated by the US or large-cap sectors, while the Australian market is heavily weighted towards banks and resources. This can unintentionally channel capital toward specific regions or sectors, influencing investment decisions rather than reflecting optimal risk-adjusted opportunities. Fixed income indices, particularly for private credit and other private assets, lag equity indices, limiting transparency, comparability and the ability to benchmark alternative strategies effectively.

Cost and complexity are significant constraints. Tailoring benchmarks to reflect internal portfolio objectives, sectoral tilts, or exclusions is often prohibitively expensive, discouraging nuanced approaches. To address these limitations, some organisations create internal benchmarks, build bespoke exposures, or collaborate with index providers to develop customized solutions. Portfolio completion techniques are often used alongside these approaches, allowing managers to achieve target exposures by overlaying liquid assets to replicate risk and return characteristics of unlisted or emerging investments while waiting to deploy capital. This enables efficient risk management and flexibility without needing full-scale benchmark customisation.

A key principle emphasised is that benchmarks should guide oversight, not dictate decisions. Over-reliance can distort allocations, as seen with US equity and fixed-income exposures. Greater flexibility, standardised methodologies for asset allocation benchmarks and tools to tailor exposures, particularly in private markets, would improve governance, comparability and long-term outcomes. Overall, evolving indices and internal solutions are critical to reflect modern investment realities, manage concentration risks and support high-conviction, long-term investment strategies.

Tackling the rising costs of indexes

The high and rising costs of index provision, particularly amid global fee compression in investment management, are a significant concern for super funds and asset managers. Traditional index providers operate as a small oligopoly, limiting competition and driving up costs. While widely used indices provide transparency, documented methodology and global recognition, fees remain high and super funds often lack sufficient influence to negotiate reductions. Mandated indices for regulatory purposes, such as the APRA performance test, further entrench reliance on a constrained set of providers, reducing flexibility and reinforcing the oligopoly.

Larger investors with scale can partially mitigate these challenges by selecting providers based on cost, quality and methodology and by managing implementation expenses rigorously. Internalisation of investment management amplifies the impact of high index costs, as funds directly bear expenses that were previously absorbed by outsourced managers, making cost pressures more visible. Technology is beginning to disrupt the market, enabling new entrants to offer faster, more customised, data-rich indexing solutions. This has the potential to increase competition, reduce fees and provide more tailored benchmark options.

Self-indexing is an option under consideration but introduces risks, complexity and potential false economies if not executed at sufficient scale. Overall, the combination of a limited provider landscape, mandated indices and increasing internalisation highlights the structural challenges in indexing. Broader competition, technology-driven innovation and regulatory flexibility are seen as key levers to improve efficiency, reduce costs and better align index solutions with long-term investment outcomes.

Learn more about our speakers here.

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