But in time, as funds grow, they will tread paths similar to that taken by UniSuper and build internal teams to manage their allocations to traditional asset classes, such as domestic equities and bonds, and only hire external managers to invest in markets requiring specialised skills, such as emerging markets equities. “My guess is that funds managers will need to show funds that they add value and can do something the fund can’t do,” Block says, adding that any prolonged misalignment of interests “has to end in tears and anger eventually”. “I am always happy to pay for value, however that is perceived. It is not about reducing fees, but rather reducing unrewarded risks.” “Funds managers will ignore my advice at their peril, because the move to insourcing is already strong internationally and is now taking hold in Australia.”

But the funds aren’t saints. They too are captive to their own short-term interests. Block says the tendency of funds to spend so much time and money choosing active managers at the expense of asset allocation and strategy can be best explained by the ‘agency’ problems in the investment industry, notably raised by Jack Gray and Ron Bird from the Paul Woolley Centre for Capital Markets Dysfunctionality.

He points to a passage in Pioneering Portfolio Management, written by David Swensen, (who as chief investment officer of the Yale University endowment’s alternatives-rich portfolio is no stranger to high funds management fees) to illustrate the agency problem:“Nearly every aspect of funds management suffers from decisions made in the self-interest of the decision makers, not in the best interest of the fund,” Swensen writes. “Culprits range from trustees seeking to make an impact during their term on an investment committee, to portfolio managers pursuing steady fee income at the expense of investment excellence, to corporate managers diverting assets for personal gain. Differences in interest between fund beneficiaries and those responsible for fund assets create potentially costly wedges between what should have been and what actually was.”