Unisuper would consider benchmarking its returns after fees with a diversified passively run portfolio to justify the use of active management.
The proposal was made by John Pearce, the fund’s chief investment officer, in response to criticism of the impact active management has on fees in the Financial System Inquiry’s interim report.
Unisuper’s balanced fund returned 13.9 per cent to the end of the financial year and has a five year return of 9.9 per cent – Pearce says he always compares such figures to what he calls a ‘Joe Average’ passively managed portfolio of 70 per cent in equities and 30 per cent bonds.
“Forget about what your peers do, our first test is whether we can beat Joe Average,” he said. “And as it turns out over any period we are well and truly outperforming Joe Average, so I can take some comfort that we are adding value.”
“Have we told our members this? No we have not, but maybe we could do that.”
The Financial System Inquiry interim report uses the following quote from an American group of academics, called the Squam Lake Group, to voice concern at the effectiveness of active managers in adding value.
“High-fee funds argue that their fees are justified by superior performance. A large body of academic research challenges that argument. On average, high fees are simply a net drain to investors.”
Making a comparison between active and passive funds is currently difficult to do in the Australian market due to a lack of passive fund returns over 5-10 years, according to Kirby Rappell, research manager for SuperRatings.
He predicts the active v passive debate would grow once more figures were available and he saw the ability of funds with higher allocations to alternative assets to minimise volatility as one of the comparisons that should be made.
If any Super Board has not already done a passive versus active investment strategy, they should be ashamed of themselves. Most Investment Committees should have been active in looking at different models for the best interests of their members including “passive” vs “active” and “life stage” vs the active diversified balanced investment approach with options for members to get advice about other options they prefer at different age stages.