Over the past few days i have noticed a couple of articles suggesting that some major Industry super funds are moving to passive investment approaches and managers to look after core components of their investments. Yesterday is was Local Government Super, today AustralianSuper - AustralianSuper Saves $4m.
A quick reminder, passive investing is opposite to the predominant active investment approach taken by most fund managers and individual investors. Rather than picking which company or industry sector is going to outperform going forward, passive investors invest in the entire market usually value weighted. i.e. larger companies like BHP on the ASX200 index making up a larger proportion. Basically the market is telling the investor in what to invest and what is a fair price.
Why are industry super funds doing this?
As the linked article points out, a primary reason is to limit costs. With a passive investment approach you do not need to spend huge amounts of money researching companies, rather you let the market do the research for you. You are also buying and selling much less often thus reducing trading costs. Thirdly, because you are trading less, you are realising capital gains less often and therefore you are receiving more cost effective returns.
So if industry super funds are using a passive strategy, should you?
This firm's investment philosophy and approach answers most definitely. The decision is not only about reducing costs. The end goal is to get the best possible return from a particular asset class. I will leave our Building Portfolios page of our website to set these out why passive investing makes sense.