Insto investors question active management

Never before, or at least never in living memory, have super funds faced such uncertainty as in the past 12 months. But with signs of recovery emerging for both markets and the global economy, trustee boards are feeling that it is safe to get back into the water. Most have been sitting on cashflow build-ups and have recovered a good part of their Aussie dollar hedging losses from last year.

The big question now is: what to invest in? If you believe in the recovery and mean reversion then this could be the best beta play of all time. On the other hand, active managers claim the markets represent a stockpicker’s paradise. The old active versus passive debate has returned with a vengeance. SIMON MUMME and GREG BRIGHT report.

Jack Gray and Ron Bird are working together on a paper, for the University of Technology Sydney, which will look at why investors continue to choose active managers.

It’s a strange phenom­enon given that everyone has known for years that the average active manager struggles to beat the index after fees over long periods.

The academics theorise about several reasons, from vested interests to hubris. There are periods of years, too, when the average active manager actually does outperform and there are also markets, such as Australian equi­ties, where outperformance of the index seems easier than in others.

But just when you thought the debate had waned and active managers had learned to co-exist with passive, content to see 20-25 per cent of the institutional market tracking the main indices, AustralianSuper, the coun­try’s largest industry fund, announced it would index $3 billion, or half its Aussie equities portfolio, sacking 21 managers in the process. Suddenly the debate is on again. What makes it different this time is the belief that this time it actually is different. The markets fell so far, across the board, that it is clear that they have overshot on the down side, notwith­standing a partial recovery in prices since March this year.

So, if you think most of the money to be made in the near future will come from beta, why pay active fees? Well, in Aussie equities at least, the median manager’s outperformance climbed steadily in the year to March, according to Mercer data, finishing that 12-month period near an historical high point of 3 per cent before fees (see chart). David Carruthers, a Mercer princi­pal, says that there seems to be a notion that active managers tend to outperform more consistently in down markets but that does not hold true at least for Australian equities. “What is true is that active manag­ers do tend to do better when there is a lot of cross-sectional volatility,” he says.

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