By Greg Bright
In August last year, John Peterson, researcher, former asset consultant and fund manager, published a controversial study which showed a balanced active option outperforming a “lower fee” passive option for Australia’s biggest super fund – AustralianSuper – over several periods. Some people questioned the comparison at the time. Peterson has now updated the study.
His latest figures, for AustralianSuper (see below) illustrate a widening gap of outperformance for the active balanced option over the similar indexed balanced alternative, available through the same fund. This occurs despite a higher fee being paid in the active balanced option in both the latest study and its earlier counterpart.
For the periods up until December 2017, the investment-related fees for the active balanced option – investment plus performance and indirect fees – total 0.72 per cent. The comparative index diversified option has fees totally just 0.17 per cent. Nevertheless, the net return after fees for the active option is significantly superior.
Peterson, principal of the Peterson Research Institute, said last week: “While the accepted wisdom would have it that the balanced option should underperform due to its higher fees, the reality is that, over all periods, the active decision has added significantly greater value than the investment fees incurred.”
As this newsletter has often reported, APRA has been pushing super funds towards lower fee investment options, such as with the MySuper requirement, for several years. As a consequence, this has created a bias towards index funds. The regulator has also been pushing for more fund mergers to obtain better benefits of scale.
However, David McMahon, another former asset consultant and super fund trustee, questioned Peterson’s original comparisons last August. While he admitted he did not have sufficient data to do a proper analysis, he said factors which could affect the relative performance between the active and passive options included: a simpler strategic asset allocation for the indexed product with, therefore, less diversification, a significant portion of unlisted assets in the active product – but necessarily none in the indexed product – and no available information on hedge ratios used for each.
Peterson says that, in Australia at least, the debate is not actually about active versus passive strategies, but rather about manager fees (active) versus no manager fees (passive) – as per the MER and cost calculations required on product dashboards with MySuper products.
“Thus low-fee / passive funds, by definition, exclude those investment strategies such as PE, Hedge Funds, non-listed Infrastructure, Direct Property, (indeed most of the unlisted strategies) that only exist with manager skill, and hence fees,” he says.
“Certainly, on everything that I have seen from the regulators (with RG97 just being the icing on the cake), they have a belief that lower costs are ‘better’ no matter what. There seems to be no recognition that super funds invest in active strategies and pay management fees/costs accordingly because they expect that managers will add value after fees.”
McMahon said last August: “I’d like to add that I’ve seen a lot of research on the selection of active managers, and whether overall it definitely adds value. All I can say is that even with skilled, experienced and disciplined teams researching managers and selecting them on a well-constructed methodology of quantitative and qualitative evaluation factors, the results are mixed.
“At one asset consulting firm, the results were overall positive over one 15-year period, but when the same survey was done on manager recommendations over a different period, or in different geographic areas, the results were that on average they did not add value over that subsequent period.
“My own view is that both active and passive management has a role in portfolios, as the latter can be used in sectors where there is less confidence in either being able to select the better managers, or where there is less opportunity for managers to add value because of the investment opportunity set and the dispersion of returns (e.g. cross-sectional volatility of returns in that sector over a time period).”
Peterson says he agrees that both have a role to play, however, he does not agree with ASIC/APRA’s ‘belief’ that reducing fess by necessity is ‘good’. “This is just as invalid as the common ‘belief’ that the market index is ‘good’, and hence any deviation from it is a ‘risk’,” he says.
He said that the reality of the figures reflected the ability of institutional investors to be able to select managers who add value after fees and did not invest with the “average” manager.
See exec summary
“APRA notes that the lowest fee structure will not necessarily provide better outcomes for members over the long term. Enhancing overall long-term member outcomes by, for example, improved education and advice to support informed choices by members or more tax-effective investment management, may have a more material impact on long-term net outcomes for members than relatively small reductions in investment or administration fees.”
Refer top of page 2 and the section ‘objectives of superannuation’
“As APRA noted in our submission on the Issues Paper, a range of possible different investment strategies, and overall cost and fee structures, may be expected to deliver appropriate member outcomes over the long term. It is not necessarily the case that the lowest fee structure will provide better outcomes for members over the long-term.”
“In other words, lowest costs or fees are not always better; if costs are pushed too low, the quality and sustainability of the benefits or services provided is likely to suffer.”