At the latest workshop for the Paul Woolley Centre for Capital Market Dysfunctionality, held at UTS in April, Professor Ron Bird outlined upcoming research, including work of his own with Jack Gray, on the economic consequences of dysfunctional markets. Bird and Gray (who is a director of alternatives placement agent Brookvine and part-time academic) have looked at “the puzzle of active management” and “investors’ response to uncertainty”. They are planning research projects including “a new framework for the superannuation industry” and “how do fund managers treat institutional investors and why do the investors take it?” Bird and Gray’s work has led them to believe that an “uplift” – either increased returns or savings – of about 3 per cent a year is available to super funds.

This would come about if they, as a whole, are able to solve the problems – due to agency issues – of their service providers and do a major consolidation leading to co-operation for investments rather than competition. Work by the centre’s founder, London-based Paul Woolley, has followed a similar theme. A recently published paper by Woolley, Bruno Biais and Jean-Charles Rochet, entitled “Rent Capture Through Financial Innovation”, sets out the agency problem for funds in a rational (non-behavioural) framework. The combination of moral hazard (because managers have limited liability) and opacity (due to innovative products) is at the core of the agency problem.

Enthusiastic innovation by fund managers and investment banks turns out to be a good predictor of a looming crisis (think collateralised debt obligations). Woolley believes a potential uplift of 4 per cent exists, roughly equivalent to doubling annual real returns, and is available to pension funds if the agency and some other issues are addressed. His extra percentage point comes from what he perceives as “wastage” at the company (stock) level in the dealings between corporates and investment banks and similar service providers. In his presentation to the UTS workshop, entitled “A Manifesto for Giant Funds”, Woolley provided a list of practical recommendations for funds (see box). Giant funds – which Woolley did not define but included most wholesale pension and other funds – should act collaboratively to counter agent power and fees.

Similar to Bird and Gray for Australia, Woolley believes there is scope for mergers between large funds to cut costs and increase negotiating power. Bird and Gray have proposed that an optimum number of super funds in Australia might be as few as six or seven, with a similar number of external managers. Move over, Jeremy Cooper. Another interesting presentation at the workshop concerned a major new research project by Susan Thorp and others from UTS on superannuation and consumer choice. The five-year project, which began this year, has received $1 million in funding from the Federal Government. The researchers will look at member behaviour with investment choice and at crucial times such as on retirement. Some earlier work by the researchers has already shown how “illiterate” consumers are with respect to their super. The Paul Woolley Centre funds many research projects at the London School of Economics, the University of Toulouse, and UTS.

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