SYDNEY - Australian superannuation funds using balanced managers outperformed those using specialist managers in the four years ended June 30, 1996, a study by the accounting and consulting firm of Coopers & Lybrand (Securities Ltd.) shows.
The study found the funds using balanced managers had returns on average 31 basis points per year higher than those using specialist managers, even though specialist managers, on average, outperformed balanced managers during the same period.
The report concluded there is "some slippage (or leakage) in the returns from funds using sector specialists, which is preventing them from capturing the excess return. This may be explained partly by cash holdings, partly by asset allocation/rebalancing and partly due to other implementation leakages."
The study showed funds using specialist managers' median returns in the years ended June 30 for 1996, 1995, 1994 and 1993 were 10.1%, 7.1%, 7.2% and 10%, respectively, for a compound-annual return for the four years of 8.69%.
For funds using balanced managers, the median returns in the same periods were 10.4%, 7.4%, 8.4% and 10.6%, respectively, for a compound-annual return for the four years of 9%.
Yet the study showed specialist managers had, on average, outperformed balanced managers in most asset classes, the exception being real estate. In fact, the specialists had, on average, also outpaced the appropriate indexes.
For example, managers specializing in Australian shares had a median four-year compound annual return of 13.2%, compared with the median balanced manager return in that sector of 12.9% and the index return of 12.4%.
Managers specializing in non-Australian shares had a median four-year compound-annual return of 13.3%, compared with 12.3% for the non-Australian share portfolios of balanced managers, and an index return of 12.6%.
The specialist managers also outperformed the balanced managers in both Australian fixed income and non-Australian fixed income by 40 basis points each over the same four-year period.
Commenting on the study, Jon Addison, a director of Coopers & Lybrand, said it showed the "pot of gold" some fund executives expected to find in specialized management was not there.
Mr. Addison said the study suggested fund executives would have to carefully manage the specialist manager process, and rebalancing is a very important part of the process.
"If you appoint a specialist manager and he does a good job for you, are you then willing to take money away from him and give it to a manager who has been underperforming?" Mr. Addison asked. "Most trustees would not do that."
However, balanced managers with good disciplines often do exactly that, he said.
Mr. Addison noted four years was a relatively short period to evaluate specialist manager programs, and said the study would have to be updated annually.
He also said he expected the results of specialist management to improve as funds using such managers learn to better manage the process.
Dick Morath, chief executive officer of Lend Lease Corporate Services, Sydney, said the study was undertaken because four-year performance data on Australian funds had become available and those using balanced managers seemed to have performed well. Lend Lease commissioned the study.
Lend Lease, he said, is a manager of managers of A$30 billion (U.S.$22.5 billion) using 25 specialist managers worldwide. Between A$15 billion and A$17 billion is managed in balanced portfolios, with the remainder in sector portfolios, he said.
Mr. Morath said Lend Lease's balanced portfolios had been able to add significant value above index fund performance. The reasons appear to lie in the way other trustees make their decisions, he said, especially when they add or replace a manager.
Few would replace a top quartile manager, or hire a bottom quartile manager, he said. Lend Lease will do that when it sees circumstances have changed.
