We’re talking about all the different kinds of investments your superannuation fund is making on your behalf. We’ve established that these investments fall into one of two “types”. The first being Defensive Assets, which are things which tend to do “ok” when times are bad. The second are Growth Assets, which tend to do well if the economy is doing well. Last week we talked about Private Equity. This week it’s Public Equity.
This is probably the most well-known, yet least understood of all the asset classes. Public equity just means shares listed on the stock market. It’s what everyone knows and it’s what everyone reads about. Put simply, Public Equity investments just means that your superannuation fund has investments in a number of companies which are listed on stock exchanges all over the world. They typically break up these investments into one of three categories.
- Australian Equities – Stocks listed on the Australian Stock Exchange AKA the ASX.
- Developed Market Equities – Stocks listed in countries which are, for want of a better term, “developed”. Think the United States, Germany, Japan, France, Belgium, Italy, Spain…. You know, pretty much any country which had a major role in the last two world wars.
- Emerging Market Equities – Stocks listed in countries you typically back-packed around during your mid 20’s when you were trying to “discover” yourself.
Obviously there are thousands and thousands of different companies across Australian, Developed and Emerging markets and it would be pretty hard for any one investment manager to be completely across every one of these companies. Therefore, superannuation funds hire different investment managers to manage different portions of the public equity space. Some may be country specific, like Australian Equities managers. Others might be regional specialists like Emerging Market managers and others still may have a specific expertise in a single industry, like technology companies.
The role of your superannuation fund is to identify the best managers in each of these areas and then give them some money to manage on their behalf.
And, well, that’s really it.
Except to say this.
There are two main types of investing strategies when it comes to public equities. There’s the passive approach, whereby the investment manager just tries to do as well as the “market” does. This is a super simple strategy. Essentially these managers are attempting to replicate the exact returns of which ever stock market they are invested in. It’s called a passive approach, because they don’t have any decisions to make. They just buy an exact slice of all the stock listed on the market they are trying to replicate. If you wanted to, you could do it yourself, but administratively it’s a pain in the neck so you outsource to a professional. Because there isn’t a lot of thinking involved, the fees for these types of strategies are really low.
The other type of investing is called active investing. These types of investment managers are trying to do better than the average investor in the stock market. Rather than buy a slice of every single stock listed in the markets they are investing, they try buy a smaller subset of companies which they think will do better than the average. The decisions are active decision, hence why it is called active investing. And because investment managers who do this think their skill in identifying better companies than the average investor is so strong, they charge significantly higher fees for their service.
As I wrote on Tuesday, “if passive investors and active investors represent the entire investor base in the stock market, and passive investors get the average returns of the stock market, it therefore HAS TO FOLLOW that active investors in aggregate must also receive the average returns of the stock market. Therefore the difference becomes one of fees. And because active managers charge higher fees, Warren Buffet believes that active managers, net of fees, will under-perform passive managers, net of fees.”
The role of your super fund is to identify only the very best active managers, who are expected to consistently out-perform the average investor net of fees. This isn’t an easy task mind you…
Anyway, that’s 5 Minutes. Hope it helped.