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”.
Cost irony behind regulator actions
(pictured: Damian Moloney)
By Greg Bright
Management expense ratios of super funds will increase under the latest regulator moves – ASIC’s RG97 disclosure requirements – it was generally agreed at last week’s Frontier Advisors client conference. You sometimes wonder whose side the regulators are on.
In his introduction to the conference, Frontier chief executive, Damian Moloney, outlined the current challenges facing the consulting firm’s 20 retainer-based clients and 10 project-based clients, which account for $265 billion in assets in total. Many of those challenge also represent problems for asset consultants.
In recent discussions and a formal survey of client views, Moloney said that of the biggest challenges facing funds, first and foremost was the “2 per cent interest rate environment”. Funds were struggling to adapt to the lower expectations, and those of their members.
Other challenges included:
- capacity – where many leading managers could not be accessed, which was one of the drivers of fund internalization of investment capabilities
- looking for “different ways” to implement investment ideas. You didn’t always need to use fund managers, Moloney said
- Whether ESG van be handled better – “it’s time that this is fully integrated into the investment process”
- Dynamic asset allocation – “how do you make money out of it?”
- How do you find truly diversifying investments?
Moloney said that RG97 would increase fund MERs and the trend to retailisation would add pressure on competition. But, in its deliberations, Frontier came up with a set of ideas for super funds, Moloney said, focusing on the big advantage that the not-for-profit funds had with trust from members.
“They have to maintain that difference in trust level,” he said. “The not-for-profits have an integrity bonus.”
About 110 big super fund executives and trustees and a sprinkling of invited managers attended the Frontier conference in Melbourne on June 21. The big themes of challenging investment markets, fund insourcing, retirement demographics and retailisation tended to dominate the discussion.
Nevertheless, the new RG97 requirement of greater disclosure in matters such as fees, was, ironically, acknowledged as likely to have a negative impact on overall costs.
As one participant noted: “The MySuper requirement may well end up costing members money because of the prescriptive way APRA forces funds to look at fees rather than net returns… With RG97, realistically, what difference will it make except to increase the overall cost burden?”
MySuper’s introduction followed the Cooper Inquiry into the superannuation system in 2010, led by former ASIC deputy chair Jeremy Cooper, who is currently chair of Challenger’s successful retirement income business. Cooper is rumoured to be the frontrunner to become the next chief executive of ASFA, a position recently vacated by Pauline Vamos.
In a session on investment insourcing, the conference was told that super funds on the surface appeared to have similar aims and aspirations, as well as similar views on implementation. However, beneath the surface their aims and views tended to differ markedly.
Geoff Warren, the head of research at CIFR (Centre for International Finance and Regulation) spoke to a recent paper he published resulting from interviews with 20 super fund executives and their advisors, plus some independent analysis.
He said: “This was a portrait of an industry feeling its way. In general on the surface there was broad agreement but beneath that surface there was striking diversity of views.”
Warren said that he became less skeptical about the benefits of insourcing having done the research. The benefits became more apparent, he said, and the key risks seemed more manageable. He was also pleased to see that insourcing was limited in its scope to just part of a fund’s assets.
“I think that active asset allocation is probably more dangerous [than fund insourcing]. I cam away being broadly supportive and recognizing that this provided scope for funds to establish a platform for growth.”
