The ANU's Geoff Warren

Fund managers can bring tremendous value for institutional grade investors due to better pricing and a higher degree of expertise, but the case for active management is much harder to make for retail investors.

That was the view put forward by Geoff Warren, an associate professor at the ANU’s College of Business and Economics, at an ‘Active Advantage’ seminar in Sydney this morning.

“Institutional investors can make a good fist of going active,” Warren said during his presentation. “They pay lower fees, they can use direct mandates, they have access to manager selection skill and they have better oversight.”

“But if you’re a private investor, a retail investor, you might think twice,” he said. “You’re going to pay higher fees, you probably don’t know much about manager selection and you’re buying the product because you like the logo or you like the story or something, and you’re dealing with all the agency risk.”

The discounts available to superannuation funds and other institutional grade investors was a big part of their advantage, Warren explained.

“Generally, if you’re an institutional investor the difference would be 30 to 60 basis points. Big difference. This is not an innocuous thing, those fees you take off make a big difference to the average outcome,” he said. “Small investors pay a very different fee to large investors.”

The event was put on by three global fund managers ­– Baillie Gifford, Capital Group and MFS ­– representing almost $3 trillion worth of funds under management.

Zero sum game?

Warren’s candid presentation included a comparison between William Sharpe’s 1991 proposition that active investing is a zero-sum game after costs, and the view of Grossman and Stiglitz in 1980 that the net return for active and passive is effectively the same.

The debate – which he also detailed in this 2019 piece for Investment Magazine – concluded that there was considerable benefit in active management, and any active versus passive debate needed the context of investor circumstances.

“The broad generalisation that active funds should be avoided… I don’t think is supported by the academic evidence,” he said. “Where I land is that active versus passive is really dependant on the circumstances. Who is the investor? What is the market we’re looking at? What is the situation?”

Sharpe’s theory that active investment must be a zero or negative sum game has several “chinks”, Warren said. Not all active investors are the same, for a start. Further, trading and fund flows meant that there really is no such thing as a passive investor.

“Sharpe presents it almost as a mathematical truism that this must be the case,” he said. The reality, Warren countered, was “a lot messier”.

Ultimately, taking sides in the active versus passive debate was a reductive way of looking at investment, he explained.