Sunsuper's specialist managers are currently almost all of the active variety. But not for much longer. Scott Hartley, the chief executive who has been in the job for 12 months, won't give figures and time frames, but it is clear a substantial shift from active to passive management is under way.

"We will raise our allocation to passive to a significant level over time as the fund grows," Hartley says.

"We find it increasingly hard to find value in active management," he says, adding that Sunsuper's assets surged 22 per cent in the 12 months to June 2014 after absorbing the $400 million Chifley Super scheme in December 2013.

Sunsuper's move towards low-cost passive management is likely to be most pronounced in international and Australian equities, and is an acknowledgment that in both asset classes active managers have a tough time outperforming the underlying index.

Active funds have underperformed

Hartley notes that Australian super funds that have invested in global active funds have underperformed the index over the past 15 years.

Actively selecting global equities, Hartley argues, is a highly complex business. In Australia the ability to outperform the S & P/ASX 300 is hampered by capacity issues.

"It is clear that having 100 per cent in active management in these two markets will not add value," concludes the Sunsuper chief. None of the super fund's current crop of equity managers, which include Acorn Capital, Baillie Gifford, GMO Australia, Lazard, Oddo and Maple-Brown Abbott, is on the chopping block, but Hartley won't rule out axing managers over time.


In going the passive route, Sunsuper is breaking ranks with some of its rivals, such as Telstra Super, AustralianSuper and Unisuper, which have been building large in-house asset management teams as a way of cutting costs.

Hartley is not a fan of the in-house model, on the grounds that if internal managers perform well, they are bound to want to leave or be poached. If they are not performing well, the fund has a problem on its hands (sacking employees is invariably harder than sacking a third-party manager).

The in-house model, the Sunsuper boss suspects, is unsustainable.

"If the objective is to cut costs, our view is that you need to have an element of the portfolio in passive," Hartley says.

How best to reduce fees will be a good topic for a conference some time. AustralianSuper, the $85 billion industry fund behemoth, is convinced by the in-house management model, aiming to have as much as 30 per cent of the portfolio managed by internal teams. The shift is expected to cut costs by two-thirds.

Regardless of whether super schemes are cutting costs through a move to index management or taking investment management in-house, the impact on active managers will be much the same. There will be less work around for active managers, run-of-the-mill index-huggers will find it increasingly difficult to survive and pressure to reduce investment fees will only increase. And maybe, just maybe, those $10 million-a-year fund manager salaries will start to edge down.