Australia’s Plan to Save Your Retirement Fund

(Originally published here.)

The biggest pension fund in Australia is planning to directly manage30 percent of its assets by 2018, rather than outsource the task to expensive external managers who rarely justify their high fees with superior returns. This should help the fund cut costs and boost retirement benefits.

Right now, dozens of external managers run almost everything at AustralianSuper Pty. Some of these firms probably do a good job for prospective retirees by reducing risk without sacrificing absolute returns, but many others simply layer on fees while making it difficult to access your savings when you need them. Even hedge-fund managers now admit that it’s almost impossible for investors to beat the market after accounting for fees.

While the best approach probably would be to focus on tracking broad market indices, AustralianSuper should be applauded for going with the next-best thing: hiring smart people to run money directly at much lower cost. (Oddly, the Bloomberg News article highlighting this development notes that AustralianSuper expects difficulty finding talented staffers willing to move to Melbourne, which strikes me as madness.)

The Aussies are taking a playbook from another former British colony. On the other side of the world, the Ontario Teachers’ Pension Plan and the Canada Pension Plan Investment Board have developed formidable reputations as some of the world’s most aggressive independent asset managers, often bidding against major private equity funds for companies, real estate and infrastructure opportunities. Ontario Teachers’ has also had success directly trading more exotic assets, such as catastrophe bonds.

These are the exceptions, however. Of the tens of trillions of dollars in pension funds, far too much is still allocated to external managers who take bets on the directions of markets and individual stocks — bets that often fail to pay off for anyone except the people collecting the hefty fees.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)

To contact the writer of this article: Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.

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About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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