The psychology behind cost control

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As most psychologists will say: you should fret only about things which you can influence. For super funds and their managers, that tends to be about costs rather than revenue. The big costs are tax and implementation costs. They may be problematic, but they are at least under your control.

According to a new paper by Raewyn Williams, the Sydney-based managing director, research, for Parametric, a global implementation specialist manager, a good analogy is how the authorities are coping, or not, with Australia’s current record-braking drought.

“The drought crisis in Australia has evoked a sense of stewardship and responsibility for our use of water, a precious resource. We can’t predict when it will rain again, but our sense of stewardship means we ‘control what we can control. We can limit our shower time, water our gardens at night, stop hosing down the car and the dog, install water-saving devices throughout our homes and employ recycling and ‘grey water’ in innovative ways,” she says.

“The paper discusses whether the response of superannuation funds to the harsh investment conditions of these times should be any different. With yields at historic lows, alpha scarcity, market volatility and bearish pundits, controlling what you can control in your investment portfolio seems like a logical move. As with water, it may be the most responsible thing a fund can do as it stewards the retirement savings of its members.

“Much (perhaps too much?) has already been written on what superannuation funds should be doing to control fee levels, and the risk of discarding good investment ideas simply to reduce headline fees remains a valid concern. Instead, we focus on two types of controllable portfolio costs that fly under the radar in industry debate, such as taxes and transaction costs. There is evidence that a program to manage these costs, which can be grouped under implementation efficiency, can deliver meaningful benefits to members.”

Williams says that, like the largely unnoticed ‘drip, drip’ of precious water from an unreliable bucket, during a drought, a casual attitude towards these costs is not consistent with the careful stewardship of precious retirement dollars in members’ account, especially when super funds are nervous about investment markets and where their future returns will come from.

“The link between better management of these controllable costs and better retirement outcomes is clear; it is not a ‘random walk’ in the way that market returns can be; it is not a heroic, probability-weighted exercise in the way pursuing alpha is; and it is not contentious in the way that a simplistic push towards lower fees is.”

– G.B.

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