Vanguard welcomes APRA plan to rank funds

Index fund manager Vanguard has welcomed the release by the Australian Prudential Regulation Authority (APRA) last week of super research that found essentially that active investment managers usually underperform the benchmark as a result of higher management costs.

Head of retail Robin Bowerman said APRA had made a “really positive contribution to the industry debate” by publishing the controversial report, and also for actually trying to come up with a new way of ranking funds management firms.

The regulator released the report by in-house researchers, Wilson Sy and Kevin Liu, ahead of its planned annual publication of tables on the overall historic performances of each super fund over the previous five years.

The report estimated fees and expenses for the average super fund were 1.2 per cent, of which 0.9 per cent is due to the cost of active investing per year.

Bowerman said the research paper represented a “commendable effort by the regulator to actually give investors a way to rank firms based on the entity level”.

“As an industry we constantly say to investors that past performance is not a guide to future returns but we don’t give them any other support or decision-making framework to actually make a decision.”

From the perspective of Vanguard, he said, the report underscored the principle that sits under an indexing approach, and that is that, at the end of the day, costs matter enormously.

“It shows that active fund managers have a huge hurdle to overcome just to recover their own management costs, and that’s before an investor gets any benefit.”

He said another key issue raised by the report was that the sustainability of outperformance or good performance over the long term is really challenging, and that it is even more challenging to identify those managers that do outperform, he said.

“Typically there will be one or two managers that outperform, but the challenge is actually identifying them before they do so as once they start to get on a good performance turn a lot of money flows into a particular product and often that will compromise the ability for future outperformance.”