“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). Petersen sees MySuper as a major disincentive to invest in manager skill, for no other reason than its relatively high upfront price tag. Jeff Bresnahan sees another irony here. While industry funds have consistently been the biggest investors in ‘manager skill’, mostly through their relatively high weightings to unlisted assets, they in one way have the least to lose from a big shift to much cheaper investment strategies. “HostPlus can launch Indexed Balanced and not worry about it at all. They’re not worried about investment costs, because they are sending all the work out to be done externally,” he says – nothwithstanding the fact that several industry funds have an interest in an asset manager, Industry Funds Management. “But the retail funds still manage a fair proportion of what’s in their super funds within their own funds management divisions. So they’ll be prepared to race a fair way to the bottom – but not to the point where a super cheap product begins to cannibalise the rest of their business.”
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.