It recommends allocations to a wide range of active managers to diversify risk and tap into further alpha exposures, which works in the US because the market is deeper and the index is less concentrated. However, long before AustralianSuper made its beta play, Frontier Investment Consulting’s base position was that clients should have between one-quarter and one-third of all equities portfolios in passive or enhanced passive mandates.
Complexity in investments is not necessarily doomed to fail, Rogers says, but became mainstream in the last bull market, in which packed portfolios signalled “a trend to show that you were a good risk-taker”. “The whole financial industry wanted to do more interesting things in the past decade. A lot of that complexity turned out to be costly and people are looking to unwind that.” Taking a structural view of the industry, Gray argues that the number of active managers in business contributes to an overpopulation of participants in financial markets that ultimately provides a disservice to end investors and society.
Competition for short-term performance – among managers, super funds and their advisers – is eventually counter-productive as it arbitrages away opportunities at great cumulative cost, while pushing asset prices up, resulting in “huge transfers of wealth” among competing funds, to the benefit or detriment of often unwary members. The solution? Consolidating the market, so that only six funds and six active Australian equities managers exist, is one scenario being explored by Gray and Bird. “There are so many agents in the way – I’m an agent – that bring their own interests into it,” Gray says. “Consultants don’t always recommend indexing to anyone.
They should. Because there are more important things than picking managers, like asset allocation.” He says there is a need for more advice about asset allocation and investment strategies, in addition to manager research, but that consultants don’t get paid enough to make such a service worthwhile – “which is partly the funds’ fault”. “Another answer is for the funds to own managers but to hold them at arm’s length. Industry Funds Management is an example of that.” Once funds decide upon the markets in which they aim to concentrate their active risk, they need a consultant whose business model can support its needs, Rogers says.
If a fund is taking a more global view of alpha opportunities, for example, it requires a global consultant in order to plug into global research. “In Australia, you have local consultants that travel, and those that have relationships offshore, and global consultants. Bigger funds need global views. If you were doing a global equities search and compared the work of an Australian consultant and that of a global consultant, you would end up with different results.”
