John Peterson, a former fund manager and asset consultant who is known for some big and successful market calls, has published a research note which adds to the growing concerns about the trend to passive management. Maybe it’s time for an intervention.
The research note studies the performance of two main balanced options offered by AustralianSuper, the country’s largest superannuation fund, which oversees more than $100 billion. The options are identical in their aims and structure, except for one important difference. One option is passive and the other active.
What the fairly simple research does is come at the age-old debate of active versus passive from a different angle. Rather than challenging active managers to outperform market-capitalisation-based indices, it challenges the indices to outperform a bunch of active managers. And the indices fall way short, at least over the last five years.
The new research supports earlier work by Chant West to do with the net returns of big funds and how they correlate with fees. That evidence shows that funds that pay higher fees are more likely to have higher net returns for members.
The big issue is that APRA, supported by various government ‘inquiries’, including David Murray’s Financial Services Inquiry, has been for several years promoting the notion that lower headline fees should be an essential aim of big super funds, particularly in their default option. In fact, it is a tenant of the MySuper (default) regulations. In fact, it also appears increasingly likely that APRA is costing super fund members and the country as a whole a lot of money. Thanks APRA.
To this publication’s knowledge, APRA has never presented any evidence that its position on ‘fees’ would be in the interests of members over a reasonably long time period. Professional managers tend to swing between active and passive depending on market cycles. It’s all about core-plus-satellite management. Regulators, on the other hand, seem to have fixed and definitive views.
By studying the Aussie Super data, the Peterson Research Institute has found that the actively managed balanced option for Aussie Super outperformed the passively managed option by a significant margin over the past five years – 3.65 per cent net of fees in the last year alone.
And the past five years have been benign for passive management. Index funds, particularly market-cap-weighted ones, benefit from rising markets, by definition.
Peterson, who is also a portfolio manager of illiquid investments at Local Government Super in NSW, says: “The outperformance of the actively managed balanced option (for AustralianSuper) is not surprising. It simply reflects the reality that institutional investors are able to select managers who add value after fees, and do not invest with the average manager!”
Greg Bright is publisher of Investor Strategy News (Australia)