“Fees are just a small part of after-tax, after-fee investment returns.” And if lowering up-front fees becomes the priority, then some asset classes and investment styles which contribute to longterm performance, such as active management and unlisted assets, will be off-limits for funds. “Then there are all of the services provided by funds which are discretionary: limited advice, call centres and data analytics, which alert funds to members who may want to increase contributions or buy more insurance. “The focus of the fund will be more of a cheap service, rather than on providing long-term value – but funds will say they are trying to do both.” If super funds in Australia began heavily indexing their Australian equities portfolios, close to half of the ASX would consist of passively managed money, Rice says. “You would get liquidity issues and you wouldn’t get a dynamic trading market.” Funds would also be exposed to the euphoria and panic of asset bubbles. Some high-alpha managers, particularly those with global businesses, would inevitably focus their capital on other markets in Asia. The low-cost trend will, in time, change the way funds managers in Australia are paid. “What I suspect is that we’ll get a restructuring of fees so they are more aligned,” Rice says, so lower base fees and bigger performance fees become the norm. In the process, funds will try to impose claw-back provisions so that performance fees are calculated over three-year periods, but this will meet resistance from managers, whose staff are customarily paid annual bonuses. But it’s still early days in the fee debate, which is being driven by influential asset advisors Frontier Investment Consulting and JANA Investment Advisers, which have united in the campaign for a cost-recovery plus performance fee structure in funds management pay. In 2010, there were 131 investment managers operating in Australia, according to Austrade. Few of them consistently deliver brilliant returns, Rice says, and the vast majority of managers are comparable to another manager, so it’s likely they will compete on costs. Some will “break ranks” to adopt this fee structure and win mandates, but exceptional managers with limited capacity can still command bigger fees, he says. Already, big funds managers are discounting quite heavily to get or keep mandates – but aren’t disclosing this outside negotiations – and at least one super fund has stipulated lower fee terms are mandatory in recent tender documents, he says. Since bigger funds can feasibly run more sophisticated investment strategies and member services at lower costs, the race-to-the-bottom on fees will spur more mergers. But even large funds find it difficult to prevent increasing costs being passed on to members. Rice points to AustralianSuper’s 50 per cent hike in fees in 2008 to $1.50 per week as evidence of this. “That’s about $30 million a year going into product distribution, marketing and services.
Greater transparency brought on by new regulatory requirements will lead to funds quickly realising the writing is on the wall to merge, but time might be running out for some, Togethr and Equipsuper's Andrew Fairley says.
Matthew SmithFebruary 8, 2021
Darren and Chris answer this question and more in episode eight of The Rate Debate.