Access to data, increased transparency and greater understanding by investors are needed to improve the Australian funds management industry.
A new report commissioned by Monash Business School’s Australian Centre for Financial Studies (ACFS) identifies three areas where Australia lags behind other countries in providing information in the industry: portfolio holdings, managerial attributes and compensation data.
The Data Access and Availability in Australian Funds Management and Superannuation report makes three key recommendations that would bring Australian disclosure in line with the US:
- Monthly portfolio holding data should be electronically collected from all Australian-managed funds and published with a 90-day delay
- Information regarding managerial compensation and characteristics such as age and tenure should be electronically collected from all Australian fund managers
- Mandatory monthly portfolio holdings, managerial compensation data, and manager characteristic data should be regulated and collected by a central government system to ensure accuracy and allow access to stakeholders.
“Providing access to mandatory Australian fund manager compensation data will provide insights into manager incentives currently lacking in Australia, thus increasing transparency for investors and potentially enhancing the competitive environment, ultimately delivering better investment outcomes for Australian investors,” says Associate Professor Paul Lajbcygier.
“Monthly portfolio holdings data will allow stakeholders to observe the trading behaviour and performance of all Australian fund managers accurately.”
According to the Morningstar 2015 Global Fund Investor Experience report, Australia is ranked equal last with South Africa out of 25 countries for transparency. The US, however, is among one of the best countries globally for funds disclosure.
Given Australia’s compulsory contribution scheme, there is an economic imperative to determine whether the superannuation industry is running efficiently and fairly.
Funds in Australia are currently not required to disclose their portfolio holdings disclosure and there is no standardised system to measure returns or describe investment strategy. It is also difficult for investors to access information about their portfolio managers such as their names, tenure and how much they are paid.
“With access to mandatory and frequent disclosure of portfolio holdings in Australia, researchers will be able to examine and expose portfolio manipulation behaviours,” Associate Professor Lajbcygier says.
“More importantly, access to portfolio holdings could help prevent and discourage managers from engaging in these undesirable trading behaviours.”
Access to this data will also enable researchers and investors to accurately assess active management of shares and whether high fees are justified.
“Due to the lack of portfolio holdings disclosure in Australia, the performance attributed to the managerial skill of actively managed funds is poorly reported,” Associate Professor Lajbcygier says.
“As a result, it is difficult to differentiate whether the reported performance is a consequent of superior managerial skill or if it is due to other factors such as portfolio manipulation.”
Publishing fee structures
The Australian Securities and Investments Commission (ASIC) aims to introduce regulation ensuring super funds have to publish their portfolio holdings. But this has already been pushed back three times since 2014, with the first reporting day for the disclosure requirement now December 31, 2017.
The report says publishing details of managerial compensation and fee structures may increase competition in the sector and help investors to make informed decisions when choosing funds. It will also enable investors to decide whether managers are motivated to achieve the best results for them.
“Given Australia’s compulsory contribution scheme, there is an economic imperative to determine whether the superannuation industry is running efficiently and fairly,” says Associate Professor Lajbcygier.
“Any misalignment between fund managers and investors may create long-term deterioration on the retirees’ retirement savings.”
This research was produced under the ACFS Commission Research program, which supports academics to conduct practitioner-oriented research. Further details about the program and other ACFS research grants, are available here.