(pictured: Russell Clarke)
Mercer chief investment officer Russell Clarke has thrown his weight behind the growing criticism of Australia’s fee obsession. Fees are driving investment decisions and that’s not in the best interests of the end investor, he says.
Clarke participated last week in a webinar organised by researcher Stewart Oldfield of Field Research. Clarke said he found it “somewhat exasperating” to witness some of the manager fees paid around the world. Australia was among the two or three lowest fee-paying countries, he said.
“There seems to be a disconnect between what some parties would have you believe is the benefit and what the reality is,” he said. “I’m a little bemused as to how the discussion has gone in our market. Maybe it’s because we are a predominantly DC [defined contribution] market. It’s not a bad thing to get fees lower, but we are now seeing that that’s driving investment decisions and that’s not in the interests of the end investor.”
Clarke is responsible for the day-to-day operations of Mercer’s implemented consulting business in the Pacific region but also oversees the global portfolio team. He is chair of the global investment committee for Mercer’s US$130 billion implemented portfolio of listed assets.
He said pressure to lower management fees across all asset classes in Australia had become extreme in the past three years and was threatening to negatively impact net-of-fee returns because funds were altering asset mixes away from more expensive, potentially higher returning, asset classes.
“A lot of players are under such pressure on fees that it is compromising their ability to generate the best net-of-fee returns.”
He said most of the commentary on fees was misinformed and had evolved to the extent that it was becoming counter productive. “Australia is either the most competitive or one of the most competitive markets in fees globally,” he said.
In some cases global managers with high quality product were not looking to market products in Australia because fees were too low. “They are not bothering to come down to Australia even though it is a substantial market.”
Mercer’s implemented consulting business was founded in Melbourne in 1996 and grew out of a master trust offering corporate clients a one-stop shop for investment management, administration, legal, trustee and related services for their superannuation fund.
These days the Australian market is considered relatively mature and most of the business’s strong growth has coming from offshore in the past decade.
On market conditions, Clarke said the outlook for the Australian market was “mediocre” – more based on the outlook for growth than explicit valuation concerns. “We don’t think the outlook is great. The pressure on GDP growth is down and the pressure on inflation is down,” he said. Mercer’s implemented funds moved to an underweight position on Australian equities last year.
Clarke said globally there were few pockets where assets looked attractive, and the US market looked expensive. “Most equity markets, are at best, fair value,” he said.
However, it was not the time to drop a commitment to maintaining a diversified portfolio and Mercer had not materially changed the asset mix within its portfolios. “The basic premise of building a diversified portfolio has not changed. Just because bonds are expensive, they are still a diversifying asset. They still offer protection when markets go down.”
Investment managers that have an ‘A’ rating from Mercer are in the most part considered for inclusion in the portfolio. Half a dozen or so Australian managers are included in the portfolio. But ehe implemented consulting business was looking to increase the number of active managers it uses, Clarke said.
“It’s certainly true that in this environment a bigger portion of the returns will come from active returns above benchmark,” he said.