The purpose of this study is consider the investment performance of superannuation funds specialising in the management of domestic stock portfolios in light of the academy's received statement of market efficiency - the efficient market hypothesis. The study investigates a sample, free of survivorship bias, containing the complete return histories of 178 superannuation funds over the period 1991 to 1999 to measure fund performance and return persistence.
Employing both staple and state-of-the-art performance measures and benchmarks, the study provides evidence of under-performance against a passive asset selection strategy by the average fund manager. The findings cannot reject the efficient market hypothesis' suggestion that expenditures on research and trading are wasted in a market in which security prices contain all available information.
The most common challenge to the efficient market hypothesis is the persistence of performance of fund managers. Performance persistence permits the investor to fashion an investment strategy, based on ex-ante information, to achieve excess returns over passive benchmarks. Unlike recent results internationally, the findings of this study reject the proposition that fund managers are able to consistently obtain private information to out-perform markets. This provides corroborating evidence of the efficient market hypothesis.
Whilst the tests used to investigate the efficient market hypothesis can be subject to specific criticisms, a general criticism of these tests is that they explicitly ignore significant features of capital markets, such as transaction costs and management fees. These tests are denoted as testing an absolute conception of the efficient market hypothesis. Specifically, absolute conception tests are critiqued on the ground that find manager performance, affected by capital market rigidities, transaction costs and management fees, are compared to returns obtained by benchmarks operating in a vacuum.
This study makes two contributions in addressing such criticisms. First, an experimental technology for testing the relative conception of the efficient market hypothesis is developed. Second, this experimental technology provides the academy with a novel technique to quantify the costs of active asset selection over passive asset selection. The experimental technology is tested utilising a sample of Australian superannuation fund managers. The study cannot reject the relative conception efficient market hypothesis. It provides evidence that, after benchmark returns are lowered to account for transaction costs and management fees, passive asset selection provides superior returns in comparison to the returns achieved through an active asset selection strategy.
The evidence presented suggests that a rational, profit maximising investor will engage fund managers who provide low cost, passive asset selection management of superannuation assets. This strategy may be logically deduced from the efficient market hypothesis.