Tria Investment Partners managing partner Andrew Baker said active managers will need to make a stronger argument, with academia increasingly critical of active management and government after “big price cuts in super and pension schemes”.
The industry consultant said the main observation of the interim report was that there is “limited price competition in super and that the cost structure is high by international standards, implying efficiency is lower than it could be”.
Mr Baker said that given a majority of the cost structure relates to investment costs, there are limited options for making large savings.
He said trustees can de-risk the portfolio, putting it into cash, deposits and bonds, switch from active to passive management, get out of alternatives and unlisted investments or internalise active management.
“Most of these options will be seen as deeply unattractive by many funds,” said Mr Baker.
He said de-risking conflicts with the long-term objectives of most members, and most funds strongly believe in active management and the benefits of alternatives and real estate.
Super funds are, however, beginning to steer away from the most expensive products, with “smart beta the major beneficiary of this trend”.
“Beyond smart beta, the cost of active management would need to fall a lot further; or funds need to look at internalising active portfolios,” said Mr Baker.
He argued that internalising can be “much cheaper than buying externally in the long run” and provides the fund with 100 per cent capacity.
“But whether funds can manage the inherent risks and conflicts, and indeed find sufficient high quality capabilities which are internalisation prospects – those are questions which are not so easily solved,” he said.
