Beating those super fees
Is active management delivering?
15 January 2015: Superannuation trustees can’t afford to ‘rest on their laurels’ and hand over all investment decisions to implemented asset consultants. They need to actively manage these managers themselves. These are the conclusions drawn from a Deloitte Actuaries & Consultants survey of the investment performance of six major implemented asset consultants over five years to 30 June, 2014.
“The results show just how hard it is to beat the market,” said Deloitte Partner Stephen Huppert. “When we compared returns to a passive benchmark, half of the active managers did not appear to add any value. And for those that did exceed the benchmark much of the added value would have been eroded through the higher fees paid for active management.”
Deloitte Superannuation expert Wayne Walker explained: “The Deloitte survey drills into the sources of added value, isolating the impact of manager selection from decisions taken by the consultants around short and medium term asset allocation.
“The conclusion was surprising. There was clear evidence that the consultants had added value through manager selection, but that over the period analysed this was largely offset by changes in asset allocation.”
Given the spotlight thrown on superannuation fees, including those paid to asset managers by the Murray Inquiry report into the Australian financial system, balancing value and cost is essential.
What does this mean for superannuation funds?
“Trustees must be vigilant. Appointing a firm to look after assets does not abrogate the Trustee’s duty to monitor performance and to understand what is being done well, and what can be improved – and to act accordingly,” said Huppert.
“We know that implemented consultants offer what amounts to an end-to-end solution and that this appeals to trustees. However, our analysis suggests that there is extra value that can be extracted by focusing each mandate on the specific area where a consultant had demonstrated its ability to deliver added value.”
Walker added: “The major firms now offer comprehensive menus of investment options that can themselves be used to construct special portfolios for superannuation funds and for individuals. This allows Trustees to be much more precise in how they make use of the skills of the implemented consultants – concentrating on areas where they can demonstrate added value and avoiding exposure to areas where their track record is not so good.
“The technology supporting them can be used to automatically rebalance to reduce transaction costs. Superannuation funds can, and should, become more involved in decisions, and demand reporting from their advisers that allows them to make informed decisions, and to act in a timely manner.”
He explained that implemented consultants gained prominence for four key reasons:
- Their core business was to research and then identify asset managers that would deliver above average returns to add value.
- Allowing small to medium sized superannuation funds to gain access to managers and to economies of scale that might otherwise be beyond their reach.
- Being able to act quickly and eliminate performance leakage that arose from delays in replacing managers who failed to perform.
- Giving funds access to structurally diversified portfolios geared to risk levels – with the common outworking being a balanced/growth and a conservative portfolio.
Over time, and as a result of the evolving structure of the Australian superannuation industry, these products have become available to individual Australians.
Huppert reinforced this point by reminding trustees that: “The market for investment services is competitive. Industry consolidation is increasing the buying power of funds and it makes sense to exercise that power in negotiating fees substantially lower than rack rates. Individuals should also shop around and put more detailed monitoring regimes in place.”
The selected benchmark and analysis of value added
Deloitte chose the Vanguard Growth Index Fund as its benchmark because it reflects a relatively inexpensive, easily accessed, growth option for superannuation funds that can be directly compared to the corresponding active portfolios of the implemented consultants. It is a true alternative to engaging the services of an implemented consultant.
We then looked for value added in relation to this benchmark using four dimensions:
- Long term asset allocation of the active portfolio relative to the benchmark
- The value added through clearly taken positions within each sector. For example, within the Australian equity sector, one may decide to take a bias to small cap stocks.
- Short term asset allocation decisions and
- Manager selection.
Results from the survey are below:
Balanced style – added value over five years to 30 June 2014
We also analysed one year results. This is important as the timing of the period of analysis can have material impact on results and conclusions.
Below we show the annual results for manager selection. The result is quite clear.
We then looked at fees. The standard fee for the Vanguard Growth Index Fund is currently quoted at about 0.35% for amounts over $500,000. Vanguard states that these fees are negotiable, and we know that funds are able to negotiate materially lower fees for large amounts.
Fees for the implemented balanced portfolios vary by consultant and also by the amount invested. Generally, an individual investing a small amount in one of these products might expect to pay about 0.75% of the amount invested.
The results over the five years suggest that much of the overall added value is extinguished by the higher fees paid. It is important to note that:
- The asset consultants generally discount fees for large investments.
- Value added through manager selection has been relatively strong. If mandates were constructed that limited exposure to value lost elsewhere then the economics change.
The Deloitte Investment Performance Survey is conducted quarterly and is available by subscription. It captures information that allows sources of added value to be identified and measured over time.
In our next survey we will drill further into the performance of the implemented consultants and look at added value in each of the major asset classes.
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