The Big End of Town
THE REALITY OF PUTTING YOUR MONEY IN A BIG INDUSTRY OR OTHER SUPER FUND
There are a couple of lessons to be learned from the recent correction. The first is that most fund managers do nothing and did nothing. And that's a fact of life for anyone in big industry and super funds. It’s not a criticism it is simply reality, big funds are too big to do anything material to respond to significant market events like the one we have seen this year.
Yes it has been the best buying opportunity in a decade, and just maybe some of the funds have rushed money into the market when they could have taken their time, but by and large they have not responded to the Corona Crash, and here is the proof. It is the performance of the major funds over the last three months:
As you can see, on any level, big funds have performed bang in line with the market less fees. In other words, they did nothing. And anyone who’s Super is entrusted and invested in the big multi-billion dollar funds should understand this, understand how the big end of town is looking after their money.
Again, its not a criticism, its actually an important feature of big funds, that most big funds are collecting and administering your money not managing your money any more. They used to, performance used to matter, but the focus has moved from achieving and competing on performance to administering your funds brilliantly, at the lowest cost possible and, rather than outperforming, which is nice when it happens, the main performance focus is on avoiding significant underperformance, underperformance that would draw negative attention and lose the fund Members.
Performance is no longer the point of difference for the big funds, which is why they emphasise low fees instead, on performance they just have to stay in the ball park with their competitors, beat them if they can, but above all, provide no reason for their unthinking members to think about moving.
The truth is that the big funds are now in the job of professionally, compliantly, administering your investment in the market and as we have seen over this recent Corona Crash, that professional administration will deliver, as always, an average return, and delivering that is now their purpose.
But don’t dismay. Its OK, they are doing no wrong and it's not their fault, for a few reasons.
For one thing they're too big to move big licks of money, billions, in and out of the small Australian stock market or illiquid international markets in any size in short time periods. There is no way they could duck and weave meaningfully through events like the Corona Crash.
Secondly they would get crucified if they did. Taking radical bets against the markets is not their job. Come a crash the different asset classes they administer will wear whatever the market delivers. It’s the way its designed. Its normal.
Thirdly, there is no-one in those organisation, I hope, that could make that sort of decision. Their structures, built on layers of committees and approvals, are incapable of taking big decisions like that. To do that would take one person, and someone with the power to push it through. That would require the character, arrogance and balls of Bobby Axelrod, and these institutions simply don't allow that sort of autonomy within their structures. Those individuals don't exist, and that’s a good thing. No-one in the big fund industry is allowed the discretion to cock it up.
Disappointed that no-one is managing your money for performance? You shouldn’t be. Before you pull your money out of your professionally administered big compliant fund and hand it to a Hedge Fund Manager driving a Lamborghini, let me tell you the good news. You can stay in your fund and, these days, manage it yourself. It is one of the greatest developments in the last decade. Its called ‘your big fund’s website’.
Over the last few years most big funds have spent a lot of money providing you with new websites that provide previously unimaginable levels of functionality. All you need do as a big fund Member is find your latest letter or email with your account number on it, find out your password and log in to the website. Once in, and once you’ve discovered that you have three insurance policies you didn’t know about that are draining your funds every month, and you’ve seen the annual administration costs, and you’ve realised their performance against benchmark is no more or less than ‘average less fees’, the next job is to find the page that allows you to set your own asset allocation.
If any of this is too hard, most funds have fabulous customer service (they can afford it) and they will direct you to the page that allows you to choose between options like Balanced, High Growth, Conservative, Stable and others. It used to be that you didn’t have a choice at all. It used to be that you could only change this setting once a year. It used to be that you could change it once a quarter. Now most funds allow you change it whenever you want.
And this is the golden development for big fund members. The ability to at some level manage your own asset allocation. Drill down and you will see the asset allocation that sits behind each “option” you can choose from. Here are the Australian Super options and their respective Asset Allocations as an example, showing the weightings in each asset class behind each “Pre-Mixed” option:
As a younger investor with a focus on growth you would normally be drawn to the High Growth option. The High Growth option would have exposed 70.6% of your Super to the equity markets over the Corona Crash. When the Australian equity market fell 38% from top to bottom and the US fell 35%, a back of the envelope calculation suggests that this ‘option’ would have dropped about 25% in value from top to bottom.
The Stable option on the other hand, with only 23% exposed to equities, would have dropped about 8%. That’s from top to bottom.
But as we stand at the moment, after the recent bounce, with the Australian market down 23% and the US down 13%, the High Growth option would only have lost about 11% and the Stable option about 4%.
You can see why the big funds don’t bother doing much. If the worst the market can deliver in the biggest correction in a decade is an 11% drop in their most aggressive option, what’s there to worry about? Members will understand that. Sure Bobby Axelrod might have been able to time things a bit better and get that 11% down to maybe 5%, but given the liquidity issues involved, even if he had no committees to hold him up and total autonomy to do what he wanted, he was never going to make much difference and, whilst we work with the luxury of hindsight, his attempts to save 6% were, win or lose, risking something far more valuable, which is Member confidence.
Most Super fund beneficiaries don’t want Bobby Axelrod, if they do they can pull out easily enough, run their own SMSF and seek him out. For the rest of the Members, average returns less fess comes with some big benefits, all your weekends and evenings not worrying about money, reasonable costs. 24/7 transparency and peace in the knowledge that these businesses are highly regulated and run by boring committees. They are not going to cock it up.
Oh, and if you really want to, as a Member, you still manage your asset allocation yourself, and in so doing protect yourself from disaster, or expose yourself to opportunity, if you really want to. All you need is a password.
- There is nothing terribly wrong with big funds.
- They do what they say on the box.
- Don’t expect or hope for anything extraordinary which includes performance.
- They compete on low fees not high performance. Hence all those adverts.
- You can still manage your risk from the fund if you know where to click.
- With your money in safe if boring hands, you can worry about life not investment, and that ultimately, is worth paying for.
- And you might steer away from the funds that spend your money on big salaries, grand buildings, sponsorships and lavish events you don’t get invited to. There’s a bit of that going on. Member disrespect. Do you trust them? Check the salaries of the CEO and Management of your industry fund - if they are in the millions...well that tells you a lot.
Otherwise, in the end, good administration, a good website, good customer service, frugal business practices, respect for Members and low fees are what makes a good fund. Not managing your money better than anyone else. Leave that sort of thing to me.