Lower fees not about 'active versus passive'

13 October 2011

| By Tim Stewart |

The focus on fees in MySuper is about delivering the benefits of scale to the end member, rather than forcing superannuation funds into indexing to reduce costs, according to Vanguard Investments head of corporate affairs and market development Robin Bowerman.

Large funds can still utilise active management and alternatives, but they have to be 'very, very sure' that they will get the outperformance to justify the fees, Bowerman said. Net returns to members is the most important factor under the Government's proposed reforms, he added.

"The fee focus is not about investment style. It's about trustees of [the large] super funds having cost as a major consideration when they make their decisions," Bowerman said.

He added there was nothing in the Cooper Review (the basis of the MySuper changes) that said funds couldn't pay high fees, as long as they were confident they would get the outperformance to justify them.

However, after 10 years of looking at active funds in the US, Vanguard research has found that low fees are a good predictor of high returns, Bowerman said.

"The lower you keep your fees (regardless of investment style - the style's irrelevant) the more you will get as a return that you can deliver back to members," he said.

As evidence, Bowerman pointed to Morningstar research that found management expense ratios (MERs) are a better predictor of fund performance than Morningstar's star rating system.

When it came to the lowering costs through scale, he said Vanguard's $1.9 trillion operation in the US was a good proxy for Australia's $1.5 trillion superannuation system.

"Over the last 30 years, [Vanguard's] average MER has been falling from 80 basis points down to about 19-20 basis points. That's a good example of how the Australian superannuation system probably hasn't managed to capture all the benefits of scale," he said.

The US experience showed that if the Australian superannuation industry captured the benefits of scale more efficiently it could get total fees (administration plus investment) down to 66 basis points - the figure cited by Deloitte in its report to the Cooper Review, Bowerman said.