(Pictured: Ken Marshman)
Ken Marshman, the chair of REST Super and former chief executive of JANA Investment Advisers, has spent a good part of his career looking for ways to reduce the costs associated with active investment management. He presented a six-point plan to the ASI conference.
A few years ago, Marshman was the co-author, with Frontier Advisors’ Fiona Trafford-Walker, of a paper which suggested a radical new way to reward active managers. The proposal was to pay them a flat fee for their overheads and a negotiated performance fee. Trafford-Walker still battles on with the idea but Marshman retired from executive responsibilities last year, becoming the independent chair of one of his former clients at REST.
Today, he is proposing a less radical plan involving “a number of small parts” of change. After the conference heard from Jim Minifie, author of the Grattan Institute paper on costs in the super system, which is believed to have influenced the Financial System Inquiry, Marshman said: “If we want more competition in the system, we should focus less on price. I’m very very nervous about schemes to restructure the Australian system, especially if it concentrates power in a few hands. This leads to the risk of political interference and the greater risk of corruption and costs due to change.” He told the ASI conference, super funds:
> Challenge the content of regulations and the imposition of costs. He estimated the costs associated with Stronger Super at between $1-1.2 billion. “Every regulation on its own stands up but in total it’s an increased impost and should be challenged.”
> Put pressure on investment management fees. “In my previous role I worked harder and harder on this. The game has to keep on going. There’s a large amount of rent going to investment managers and this should be negotiated back to members.”
> If you believe that brand, reputation and trust are what drive competition, you need to communicate that. He said funds management was not like another product because the consumer was not buying something certain. “Buying on the basis of price, just doesn’t cut it.”
> There needs to be ongoing and more serious sanctions on trustees who breach the trust of members. This should include the breach of the promise of returns over a period of time.
> There is a need to iron out the issue of comparisons of returns and fees.
> There is a role for third-party assessments of whether members are getting value. There are parties – ratings agencies – which do this but whether they are sufficiently independent is open to question. Marshman said such agencies should not be paid by the people they were assessing.
Marshman defended active management against the encroachment of passive – partly being caused by new regulations such as MySuper – suggesting this was “lazy”.
“It’s easy to assume that the average investor can’t beat the index over time. My view is that that is extremely lazy. It’s like saying the average AFL team can never be better than ninth, so why compete at all… It’s easy for policy makers to take the lazy attitude. We shouldn’t let the debate go down that route.
He said Russell Clarke at Mercer produced some research which showed that manager selection added 1 per cent a year of outperformance over 10 years. At REST, manager selection added 1.3 per cent a year overall and 3 per cent in Australian equities over 10 years. At JANA, over 15 years and 327 mandates, manager selection added 1.3 per cent a year in Australian equities.
