The MySuper reforms’ focus on fees will come at the expense of net investment performance, a hedge fund manager has said, but superannuation funds say that fees are just one of many considerations in portfolio inclusions.
BlackRock Australia director and senior investment strategist David Griffith said hedge fund fees had been in the spotlight “because in any simple ranking of headline Management Expense Ratios (MERs), hedge funds are typically at the top of the list, with index funds in the bottom”.
However, InvestorDaily understands that as MySuper options will be default options, typically people will end up in them because they do not make a choice, so the issue of fees and returns will not be a consideration.
BlackRock’s Griffith said hedge fund strategies aimed to deliver returns which were largely independent of market direction.
“Given their low correlation with traditional assets, hedge funds may also help lower overall portfolio volatility,” he said.
Hedge funds were typically less constrained than long-only active strategies, which provided great opportunities to maximise the information ratio of their returns.
“In addition they aim to be capital-efficient for investors,” he said.
Industry super fund AustralianSuper agreed that long-term net performance needed to be the focus for members and therefore funds.
“Providing the best possible investment outcomes for members requires that decisions are based on costs and potential returns”, a spokesperson said.
The common perception was that hedge funds were riskier than equity markets, however this view was incorrect, Griffith said.
The standard deviation of returns for several common hedge fund styles, as measured by the Dow Jones Hedge Fund indices from January 1994 to December 2011, showed that all had exhibited lower return volatility than global equities, with several styles exhibiting risk closer to bonds than equities.
“Yet MySuper’s very strong focus on fees could potentially deter investments in hedge funds based on MER comparisons and at the expense of higher returns,” Griffith said.
For example a passive Australian equity fund (based on the S&P/ASX 200 Accumulation Index) delivered 5 per cent annualised returns with 14 per cent volatility for the three years ended April 2012.
By contrast, the Dow Jones Credit Suisse Hedge Fund index delivered around 12 per cent total return net of fees with around 6 per cent volatility over the same period.
“An investor making investment decisions primarily on fees and giving less regard to expected return would have achieved a much poorer investment outcome,” Griffith said.
“The investor could have enhanced their equity returns through a more expensive active stock selection strategy, which typically targets returns of 2 per cent in excess of the S&P/ASX 200 Accumulation Index (net of fees).
“Even if such a strategy delivered target returns, this would still leave a significant performance gap between the traditional equity portfolio and the hedge fund index over this period.”
