Super funds lag on portfolio optimisation

The Australian superannuation industry is behind in terms of how funds optimise a portfolio from a fee-for-service perspective, Northern Trust Asset Management believes.

Northern Trust Asset Management's global head of retirement solutions, Sabrina Bailey, said not a lot of super funds had not dug deep enough to break apart portfolios to truly understand where value add was coming from, whether it was from stock selection skills, bond selection skills, or from factor exposure.

Bailey said their members tended to be less informed about the difference between fees-for-value and fees.

“If that continues I would argue we would see in the Australian market as we have seen in others, a move to potentially factor strategies and/or asset mandates to try and balance out that fee from a competitive nature,” she said.

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“The first place to lower fees within a portfolio is really looking at factor-based strategies whether they are engineered equity strategies, or a strategy that mirrors an index like the Morgan Stanley low volatility index managed by a provider like Northern Trust, it’s really honing in and looking at that portfolio and what’s driving returns in the portfolio.

“Are you paying active management fees and then performance is washing out for index like performance because you have 10 active managers and is there a more efficient and effective way to allocate that portfolio to essentially have no give up in the alpha in the overall portfolio.”

Bailey noted that a reduction in risk and fees would create a more efficient portfolio from an information ratio standpoint.

“Some of the leading funds are conducting this review so some of the larger funds are taking a deep dive into what is that factor exposure and how they are allocated within the competitive landscape and how do they increase that efficiency,” she said.

Bailey also said that factors would become critical in figuring out the retirement income puzzle and solving for retirement income product and solutions.

“As you enter into retirement the individuals have greater access to their assets, and are much more likely to be moved from a behavioural perspective by losses in a portfolio which is where volatility strategies comes in. So it’s managing that through factor-based strategies like low volatility,” Bailey said.