Cost-cut­ting plan to boost your re­tire­ment sav­ings

National Trea­sury is de­ter­mined to put a fi­nan­cially se­cure re­tire­ment within your reach by re­duc­ing the charges levied on your in­vest­ments, in­clud­ing opt­ing for cheaper pas­sively man­aged funds over ac­tively man­aged funds. Bruce Cameron re­ports on Trea­sur

Weekend Argus (Saturday Edition) - - GOODPOSTER -

Low-cost pas­sive man­age­ment of your re­tire­ment fund sav­ings, in pref­er­ence to of­ten high- cost ac­tive as­set man­age­ment, has been given an im­plied stamp of ap­proval by National Trea­sury in pro­pos­als it un­veiled this week to cut re­tire­ment- fund­ing costs and im­prove mem­ber ben­e­fits.

In the last of five dis­cus­sion pa­pers pub­lished over the past year aimed at re­form­ing the pri­vate r e t i r e ment- f und­ing i ndus­try, Trea­sury says its pro­pos­als on costs are in­tended to pro­vide op­tions for dis­cus­sion.

Trea­sury says the charges levied by com­mer­cial re­tire­ment funds, such as re­tire­ment an­nu­ity funds and um­brella funds, are among the high­est in the world, while stand­alone oc­cu­pa­tional funds of­fered by em­ploy­ers are com­par­a­tively low­cost – but even with th­ese funds mem­bers can be ex­ploited by fi­nan­cial ser­vices providers.

Trea­sury says costs in the R2.3- tril­lion re­tire­ment- sav­ings in­dus­try can be brought down by, among other things, con­sol­i­dat­ing funds, mak­ing mem­ber­ship of funds com­pul­sory for all em­ploy­ees, pre­serv­ing re­tire­ment sav­ings un­til re­tire­ment, and im­prov­ing the reg­u­la­tion and man­age­ment of funds.

Trea­sury also sets its sights on charges levied by the fi­nan­cial ser­vices sec­tor, propos­ing so­lu­tions for con­sid­er­a­tion by the broader re­tire­ment-fund­ing in­dus­try.

In deal­ing with the costs of as­set man­age­ment, Trea­sury is crit­i­cal of the un­der- util­i­sa­tion of pas­sive man­age­ment, the use of per­for­mance fees by ac­tive man­agers, and the opaque costs of smoothed­bonus, cap­i­tal-guar­an­teed prod­ucts pro­vided by life as­sur­ers.

Trea­sury says re­tire­ment fund in­vest­ment con­sul­tants, like other in­ter­me­di­aries, have a bias to­wards rec­om­mend­ing prod­ucts and ser­vices which in­crease their in­come, such as favour­ing ac­tive man­age­ment over pas­sive man­age­ment.

Con­sul­tants can earn higher fees if they can per­suade re­tire­ment fund trus­tees to em­ploy them to as­sess and mon­i­tor the skills of var­i­ous ac­tive man­agers man­ag­ing dif­fer­ent port­fo­lios of as­sets.

Other ex­am­ples of where con­sul­tants and oth­ers can earn ad­di­tional fees are in­vest­ment man­dates that in­cor­po­rate per­for­mance fees or com­plex, highly struc­tured in­vest­ment prod­ucts.

Trea­sury says the al­ter­na­tive to ac­tive man­age­ment, and a way for re­tire­ment funds to cut costs, is to make greater use of pas­sive as­set man­age­ment. This means putting your in­vest­ments in prod­ucts that track var­i­ous in­vest­ment mar­ket in­dices. For ex­am­ple, a pas­sive port­fo­lio could track the FTSE/JSE All Share In­dex or sec­tions of a mar­ket, such as the fi­nan­cial sec­tor.

Ac­tive in­vest­ment man­agers seek to iden­tify un­der-priced as­sets in the hope that their port­fo­lios will out-per­form their peers.

Trea­sury says pas­sive man­age­ment is much cheaper than ac­tive man­age­ment be­cause there is lit­tle judg­ment in­volved and lit­tle trad­ing. In the long run, the sav­ing on fees com­pounds and be­comes sub­stan­tial.

“By def­i­ni­tion, the ‘ aver­age’ in­vestor, whether ac­tive or pas­sive, can only per­form in line with the mar­ket. Half of funds in­vested will un­der­per­form the mar­ket in any given year, and half will out­per­form. To­gether, they make up the mar­ket. Af­ter ex­penses, the ‘aver­age’ in­vestor must there­fore un­der­per­form the mar­ket,” Trea­sury says.

It says the case for ac­tive man­age­ment is built on the idea that out­per­form­ing man­agers con­sis­tently out­per­form and that past man­ager per­for­mance is a guide to fu­ture per­for­mance. In the ab­sence of con­sis­tent his­toric out­per­for­mance, “the case for ac­tive man­age­ment falls down”.


Trea­sury says two im­por­tant is­sues are of­ten over­looked when ex­am­in­ing the his­tor­i­cal fund re­turns of ac­tive man­agers. Th­ese are:

Per­for­mance ta­ble sur­vivor bias: ac­tively man­aged port­fo­lios that un­der­per­form are less likely to sur­vive than funds that out­per­form. Per­for­mance ta­bles in­clude only port­fo­lios that are cur­rently trad­ing. This re­sults in an ex­ag­ger­ated aver­age per­for­mance of ac­tive man­agers in com­par­i­son to bench­mark in­dices.

Risk: many funds may take on ex­tra in­vest­ment risk. The ef­fect is sig­nif­i­cant enough to make a sub­stan­tial dif­fer­ence when analysing his­tor­i­cal re­turns.

Trea­sury warns that you should view with scep­ti­cism any anal­y­sis of his­tor­i­cal man­ager out­per­for­mance that does not cor­rect for th­ese two fac­tors.

Broadly speak­ing, de­spite a large num­ber of stud­ies over many years, sta­tis­ti­cally ro­bust ev­i­dence in favour of the per­sis­tent out­per­for­mance of ac­tive man­agers is weak, af­ter tak­ing th­ese fac­tors into ac­count, Trea­sury says.

It says mod­ern fi­nan­cial mar­kets see in­vest­ment man­agers trad­ing highly stan­dard­ised se­cu­ri­ties with many other skilled fi­nan­cial pro­fes­sion­als from all over the world.

“All have a di­rect fi­nan­cial in­ter­est in ex­ploit­ing any mis­pric­ing be­tween dif­fer­ent se­cu­ri­ties, and the cost of trad­ing is lower than it has ever been. Con­sis­tently out­per­form­ing in such a world is ex­traor­di­nar­ily dif­fi­cult, and get­ting more so.”

This has driven the in­creased recog­ni­tion of the ben­e­fits of pas­sive in­vest­ment man­age­ment – in both unit trusts and ex­change traded funds in­ter­na­tion­ally.

Trea­sury says that lo­cally in­dex­track­ing port­fo­lios are mak­ing slow progress for a num­ber of rea­sons, in­clud­ing:

There is limited avail­abil­ity to re­tail in­vestors on many linked­in­vest­ment ser­vices provider (lisp) ad­min­is­tra­tion plat­forms, par­tic­u­larly on the cheaper fund plat­forms.

Be­havioural fac­tors, most notably the tri­umph of hope over ex­pe­ri­ence. Few in­vestors, whole­sale or re­tail, seem will­ing to recog­nise their ap­par­ent in­abil­ity to pick man­agers or stocks suc­cess­fully and ac­cept in­dex-re­lated per­for­mance.

Moral-haz­ard prob­lems caused

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