This article was first published in the Australian Business Review.
The top managers usually have queues of investors trying to get into their funds. Australians are often missing out.
There has been a kind of paranoia gripping the industry superannuation fund sector ever since the previous federal government rolled out the naming and shaming approach to returns, fees and costs.
This is largely centred around a term that is etched on the tongues of most in the industry: RG97. This is a reference to the rules set by the government and Australian Securities and Investments Commission about how superannuation and retail funds must disclose fees and costs. It has a noble objective to lift the veil on what was previously opaque structures where investors had no idea how much of their money was leaking out.
However, the previous government’s focus on lowering investment industry costs and fees has led to an obsession with getting RG97 numbers down for super funds. I have seen firsthand the rush by some funds to do deals totalling billions of dollars that are centred around low fees and costs. But are these the best deals to be done?
The previous government’s obsession around fees and costs assumes that one can go out and build a lower cost portfolio that delivers the same risk and return. This is not the case. But it is also not as simple that higher fees mean better returns. I have seen this firsthand working with clients like Andrew Spence, the chief investment officer at Qantas Super, who says that, like anything in the investment world, you get what you pay for.
“We are very committed to reducing our fees, but our investment partners deserve to be rewarded if they can deliver above-market returns to our members. We typically incorporate performance-based fee structures into our private market investments, so we create a strong alignment between our members’ best financial interests and rewarding our investment partners when they generate net returns that exceed our pre-agreed targets,” Spence said.
The RG97 focus has led to many super funds reducing allocations to alternative investments such as private equity and venture capital and greater allocations to low-cost unhedged long equities. This is because the leading private equity and venture capital managers typically charge a 2 per cent management fee and 20 per cent performance fee – compared to some long equity mandates that can have management fees as low as 0.2 per cent.
This makes these investments look really ugly from a RG97 disclosure perspective, but Australian private equity and venture capital funds have historically also outperformed the ASX 300 by around 6 per cent per annum over the past 20 years, net of all fees and costs.
And then there is the additional preservation of capital and risk management that stems from private equity and venture capital fund managers being able to actively manage the underlying businesses they invest in – which is typically not the case for the low-cost long listed equity funds and equity index strategies.
I often field calls from leading offshore managers trying to understand why Australian super funds are so focused on fees rather than net returns.
I usually see them shake their heads and remark that they are simply not going to manage money for those unreasonable fees. The top managers usually have queues of investors trying to get into their funds. Australians are often missing out. Mike Lukin, managing director of Roc Capital who specialises in allocating over $8bn to leading private equity and venture capital managers, says:
“We are seeing high net worth and sophisticated foundations and endowments increasing their allocations to private markets, given their strong risk-adjusted returns and access these markets provide to investment opportunities inaccessible through traditional listed markets.”
“Unfortunately, it is the average Australian worker reliant on their superannuation to maximise their retirement income that is missing out on these opportunities,” Lukin added.
Super trustees have a legal obligation to act in the best financial interests of its members.
A focus on fees and costs at the expense of better net-returns and preservation of capital is not, in my view, meeting this obligation. Unfortunately, the pressure from the previous government means super trustees have been forced to focus on fees and costs.
Superannuation trustees have the opportunity to take the brave steps in refocusing on net returns and risk management. And I believe they have a duty to do so.
The new government also has an opportunity to recalibrate the superannuation industry to bring the focus back to what it should be: protecting the hard-earned capital of Australians and to drive better net returns for us all. Here’s hoping.