A new report “from the coalface” of super fund investing has gone some way to quantifying the cost of shonky investment management, with members potentially losing out on hundreds of thousands of dollars.
Surging equity markets have driven the Future Fund’s return higher, but its prediction that inflation will be stickier than expected has been born out and it “remains conscious of the potential for significant deterioration”.
Big super’s hard bargains pay off: CEM Benchmarking
A cohort of 11 profit-to-member funds in a new CEM Benchmarking study saved on average 11.7 basis points in investment costs relative to their global peers – which translates to about A$1.07 billion in annual savings – while also adding investment value for their members.
The efficiencies are partly due to using lower cost evergreen/core fund structures in real assets – and, “more prominently”, paying lower fees to external manager in both public and private markets.
“On average, Australian supers are not only paying lower manager base fees for evergreen/core private real estate and infrastructure compared to global counterparts, but these fees are also lower than what they are paying for their emerging markets public equity, which contrasts with the global experience,” the CEM report says.
“We also looked at the fees for other major asset classes and implementation styles, including fixed income, private equity, private credit, and hedge funds. The Australian supers are on average paying lower base manager fees across all these asset classes compared to the global averages.”
Super funds are some of the most cost sensitive pension investors in the world, baulking at fees accepted as the norm in other pension markets and negotiating with managers to forego paying performance fees in exchange for chunky mandates and the equally chunky management fees that go with them.
But while external manager fees are the “primary driver” of overall cost savings for super funds, less use of internal management relative to their global peers (at least, among the sample) added 6.7 basis points of cost. Within their largest holding – public equity, which super funds have substantially chunkier allocations to – 11 per cent of assets were managed internally compared to the global average of 16 per cent.
“Contrasting” with those higher costs were the large savings from investing via evergreen/core funds in real assets as opposed to costlier closed-end limited partnerships.
“About 83 per cent of real estate and 70 per cent of infrastructure for the average Australian super are invested in evergreen/core funds, compared to the global averages of 57 per cent and 32 per cent, respectively,” the CEM report says. “Australian supers also realized large savings from significantly lower fees on these real estate and infrastructure evergreen/core fund investments compared to their global counterparts.”
Greater use of co-investments in private markets was another source of savings – around 2.6 basis points – while the use of passive management in public markets as well as less use of fund of fund vehicles in private markets contributed “additional small savings”.
All of which would come to nought if they weren’t also delivering good returns for their members. While CEM didn’t formally assess the net value added (NVA) by the sample, it did find that the NVA was “positive and aligned with short-term global results in the CEM database”.
