Greater demand for asset consultants, increased wholesale fees and the demise of traditional fixed interest mandates are some of the surprises among a list of the ‘top 10 issues for institutional investors’ compiled by Michael Block, the general manager of Workcover NSW’s investment division.
Block, who is nearing the end of a major review and restructure of the $8 billion fund’s investments, will outline his views of likely future trends for institutional investors at today’s Investment & Technology conference at the Hilton Hotel in Sydney. The conference, held in association with the Australian Custodial Services Association, was closed to new registrants last week – the first time this has occurred – having passed more than 300 attendees. Block, who says the views expressed are his own and not necessarily those of Workcover NSW, believes that larger in-house investment teams for super funds and other institutional investors will increase, rather than reduce, the demand for asset consulting services. “Asset consultants are very reasonably priced, with the cost of full traditional asset consulting services about the same as the cost of two or three professional staff,” he says. “Even if asset consulting services were to double in price, I’d put it to you that they would still offer very good value.” Block is not in favour of asset consultants charging either performance-related fees or a fee based on percentage of assets under advice. “Whilst agreeing that asset consultants deserve more, my preference is for them simply to raise their base fee,” he says. Block believes that both absolute and relative returns (against the benchmark) from Australian equities managers will fall and there will be a premium paid to those managers who are able to sell the idea that they will add alpha in the future. “If one combines lower absolute performance with the view that alpha will be harder to achieve, then the cost of alpha will increase as demand outstrips supply,” he says. On the suggestion that traditional Australian fixed interest (AFI) mandates are dead, Block points to the view of one of Workcover’s asset consultants – Watson Wyatt, which suggests AFI mandates are sub-optimal and should be replaced with a core-plus approach. Watson Wyatt says that the four traditional sources of alpha from AFI – credit, yield curve, sector rotation and duration – are enhanced by including additional sources of alpha. However, Block asks: why not go the whole hog and allow alpha from wherever? Two other reasons leading to the demise of AFI are: it is expensive from a net information ratio basis compared with Australian equities and the UBS Index is a “poor” benchmark. Block’s list of the top 10 issues is: • Larger in-house investment management teams leading to an increase in demand for asset consulting services and upward pressure on asset consulting fees. • An increase in wholesale investment management fees, particularly Australian equities, and a decrease in retail investment management fees. • A return to pseudo-balanced funds management. • The resurgence of market timing (TAA) and tilting (MAA). • The demise of traditional Australian fixed interest mandates. • Increased use of portable alpha. • Increased penetration of absolute and uncorrelated return investments. • Increased use of asset/liability modelling for all investors. • Increased use of benchmark-unaware equity investment mandates, their demise and then their rebirth as concentrated portfolios. • Beta being dressed up as alpha.
The revelation that superannuation funds are preventing low-balance members from accessing an account-based pension raises ethical alarm bells. The widespread practice places a potential handbrake on the poorest Australians entering pension phase and arguably threatens the grand bargain with the Australian public on compulsory super.
Aleks VickovichSeptember 19, 2024
