The Future Fund is favouring labour intensive, and therefore higher fee, strategies in areas where too much capital has been flowing to generic low-fee strategies resulting in high prices and low returns.
David Neal, managing director of Future Fund, clarified to delegates at ASFA Investment Interchange that fees across the asset management industry are “too high”, but that there were options that could lead to better investment and higher net returns.
In an environment of extraordinary low-yields investors are being pushed out on the risk-curve hence “funds need to consider adding another couple of characteristics to the armoury”, he said.
He gave the example of core and off-core properties.
A core property can be bought and 40 bps paid to manage the asset – the traditional approach of super funds. In the current climate the management cost is competitive, but the price paid for the asset is likely to be high, resulting in reduced returns.
In contrast, an off-core asset can be bought and 100 bps paid to manage it, which might include repositioning and re-leasing. If the property is bought at a material discount to intrinsic value, when the “remediation” work is complete, the asset can be sold into the market at the higher price.
“This additional 60 bps fee can turn a very healthy profit indeed,” Neal said.
He added: “MER budgets constrain the investment universe, and as such are categorically bad for members.”
Another example is private lending. After the GFC banks have been materially capital constrained making it difficult for mid-sized companies, even strong profitable one, to secure financing. Along with managers and “other relationships”, the Future Fund has provided $4 billion to companies as part of its debt allocation strategy.
Neal challenged delegates saying: “Do they (funds) have this ability to identify great strategic opportunities, and if so, do they have the ability to right-size them in the context of the total portfolio?”
He qualified that this would require sustainable internal resources, in skills and experience to understand the environment, as well as top-down and bottom-up information integration, and also cautioned this wasn’t an argument for building internal sector implementation but was a large strategic exercise.