Alpha is a zero-sum game and beta is uncertain, according to Steve Merlicek, the famous CIO, now in semi-retirement and, these days, as much a farmer as investment professional. So, what do you do?
Merlicek was speaking on the panel session at the Northern Trust seminar in Melbourne (see separate reports) earlier this month. He said: “If you can save on costs, that’s a certain outcome.”
The seminars, in Sydney as well as Melbourne, coincided with the launch by Northern Trust of a new ‘Integrated Trading Solutions’ service for super funds and managers. The panellists at both seminars were well acquainted with containing costs.
Lounarda David, the former head of Mercer Sentinel in Asia Pacific, former chief operating officer (COO), investments, at the $60 billion Sunsuper, and now the COO of IFM Investors, warned, however, that funds could outsource various functions, but they could not outsource their responsibility. “Eventually, we’ll have to move to a professional trustee model,” she said.
Merlicek said that the main reason why industry funds outperformed commercial funds was that they took advantage of the full opportunity set of all asset classes, obtaining the liquidity premium available to private equity, for instance. Private equity had returned about 15 per cent a year above listed markets in recent years, he said, and infrastructure had also done well. “Also, the internalising of their investment management gives them an advantage over retail funds,” he said.
Merlicek, a former CIO of Telstra Super and IOOF Holdings, who remains the chair of the investment committee of IOOF, was speaking on the afternoon of the day which IOOF managing director, Chris Kellaher, resigned after the firm’s criticisms in the Hayne Royal Commission, adding a little spice to the subtext of his comments. If they hadn’t already heard, Penelope Biggs, Northern Trust’s chief strategy officer and chair of the panel sessions, noted Kellaher’s resignation, announced to the market that morning, in her introductory remarks. There appears to be no love lost between Merlicek and Kellaher.
Campbell McCulloch, the head of fund implementation and delegated solutions, Asia Pacific, for Mercer Investment, and the former head of investment operations at the Future Fund, said people were looking to “future proof” their model, but change was often difficult to implement. “Our environment is constantly changing,” he said. “To organise ourselves to achieve success when there are multiple changes going on is almost impossible.”
In Sydney, Philip Hope, a co-founder of Morse Consulting, the operations specialist advisory business, and now a partner at Deloitte, which bought Morse, said that in the US, at least, 87 per cent of actively managed funds had failed to meet their benchmarks net of fees over the past 10 years. “Regulatory fragmentation is also a real challenge for large fund managers,” he said. “Technological advances, pressure to reduce costs and online disruption are all major trends.”
Fund managers David Sokulsky, who runs the LIC Concentrated Leaders Fund, and Ross Youngman, the chief executive of Ausbil, both said cost pressures were mounting. “It’s a big issue for all fund managers,” Sokulsky said. “We try to address it by outsourcing.”
Meanwhile, Frank Casarotti, the general manager of distribution at Magellan Asset Management, probably Australia’s most successful global equities manager, said the jurisdictions that an asset manager chose to o0perate in was crucial. “We have a head of dealing and a head of operations in Australia and Northern Trust is our partner,” he said. “Fee pressure should be looked at through a different lens. When you are shotting the lights out [with investment returns] no-one questions your fees.”