David Murray told me it was “clear” the return from active managers is not worth the extra cost when talking to me the day after the release of the Financial System Inquiry interim report two weeks ago.

This is a bold statement when applied to superannuation funds, the best of whom have a reputation for not only being sophisticated investors, but also some of the toughest negotiators on fees.

Is it a statement based on relevant analysis or is Murray just teasing the industry?

The interim report references work done by US academics based in New Hampshire, the Squam Lake Group, which state that, on average, high fees are simply a net drain to investors.

The report does not provide evidence of this. Instead, the merits of this group, few have heard of, are justified with the epithets ‘prestigious’ and ‘distinguished’. This is all a bit like the Wizard of Oz hiding behind a curtain while transferring his voice onto a big screen.

The applicability of the published work on fees by the Squam Lake Group has also been dissected here by an equally non-plussed Andrew Baker of Tria.

Does Murray, who purchased Colonial First State back in 2000 for the Commonwealth Bank, in a roundabout way just mean to stir the industry into doing the comparison with passively managed portfolios themselves, and thereby shaming those that underperform, or overpay as he sees it?

John Pearce, CIO at Unisuper, which has five year average returns of 9.9 per cent after fees, told me last week that he is confident of always beating a passive fund of 70 per cent equities and 30 per cent bonds. SuperRatings say there were not enough passively managed funds around with long track records to make meaningful comparisons yet. Not to mention that any asset allocation is, in itself, an active bet on the market.

Even if Murray’s argument against active management falls apart, the government and regulators are two beasts hungry to see evidence that member fees are going south. Unisuper, Sun Super and AustralianSuper have all publicly asserted this will happen. Others funds are talking about keeping fees where they are and could be at threat.

They say they are using cost efficiencies to help fund the sort of new products that David Murray feels are not core to the purpose of superannuation. These add to administration fees, which again add to the high overall fees Australian funds incur compared to other funds in the Americas and Europe.

Here the debate gets more complicated than any analysis that has yet been carried out. The burden of proof and investigation is going to be on superannuation funds to do this.

 

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