“I don’t think that’s a good thing, but that’s the reality.” Baker would find some dissent from Jeff Bresnahan, the founder of SuperRatings, “I still think that price isn’t genuinely all the consumer cares about, they are interested in returns and service too. Look at AustralianSuper and all the scale they are getting, with Westscheme and what have you rolling in. They’re positioned well in that the $1.50 a week looks like it can be maintained for a while, they have fantastic investment infrastructure, but the service experience with them is bad and everybody knows it,” Bresnahan says. “I think MySuper isn’t going to help the general under-investment in member administration that we have seen.” Tria’s Baker is also doubtful that cost savings from increasing scale have been passed on to members. “Price has three components: internal and external investment costs, member administration fees and a combination of other fees.” He told the FEAL forum that the average fee for a $50,000 balance across the largest 12 industry funds broke through 1 per cent in 2009, but has since dropped below this now-critical mark (see graph 1).
As funds invest more in alternatives and build internal teams, investment costs have also increased, and he wondered whether the pullback in costs throughout 2010 can be attributed to a scarcity of performance fees payable. “There are no scale benefits coming through. This industry has grown enormously, and we know administrators aren’t making any money but members are paying more,” Baker said, speculating that savings are being spent on marketing and engagement initiatives rather than fee reductions. “Funds need to be careful that if prices are going to increase, there has to be a very clear reason why members are going to benefit from it.” At some point, Baker said investment departments within funds would be given strict cost budgets: “So a CIO will be given 50 basis points or whatever the number is and they have to get the best outcome for that.”
That scenario is what keeps John Petersen, a consultant at Sovereign Investment Research, awake at night. The MySuper debate has inspired him to go on the offensive, surveying Australia’s 22 largest superannuation funds (be they corporate, industry or retail) and the results of their investment in ‘manager skill’ – which he defines as either active management of traditional asset classes, or any allocation to alternative assets such as hedge funds, infrastructure or private equity. Petersen’s research found that the main determinant of differences in the level of manager skill between super funds was their allocation to alternative assets, and that in turn their overall allocation to ‘manager skill’ had a big say in how high their returns were for the seven years to June 30, 2010 (see graph 2).