Speaking to InvestorDaily, Monash Investors principal Simon Shields said investors should abandon the 'herdlike' mentality of Australian equities managers that measures themselves against a benchmark.
Mr Shields criticised Australian equities fund managers that remain open for flows regardless of the impact of performance; stick to one style of investing regardless of the market; and live with large drawdowns and periods of high volatility.
"Why would you want to do those things? Because the output is very similar returns to your index. You just go up and down with the market and you beat it or not by 1-2 per cent every year," Mr Shields said.
The "bad thing" about the approach is that when the market crashes, fund managers have to do extremely well to make their investors' money back, he said.
"You might not be underperforming the market much, but if the whole market drops 20 per cent then you’ve got to go up by 25 per cent to make that money back," Mr Monash said.
A 50 per cent drop in the market requires a 100 per cent return to get back to the original position, he added.
But despite the problems with benchmark-aware funds management, the size of the Australian superannuation market means the vast majority of investors don't have a choice about the way their money is invested, Mr Shields said.
"That’s the only realistic way of doing it – invest into the large cap stocks, because that’s the main game. If you’re going to do that though, you’re stuck with going up and down with the market," he said.
Monash Investors' fund is benchmark-unware and targets a return of 12-15 per cent after fees – a target it has met since inception on 2 July 2012.
The fund, which takes both long and short positions in stocks mainly outside the ASX100, has achieved its target return with lower volatility and half the drawdown of the broader Australian equities market, Mr Shields said.
"We’ve also coincidentally done better than the market – which is not what we’re designed to do, but it’s nice to see," he said.
"I think the market’s saturated with relative return based investment firms. I think there will be more objective-based funds over time."
Read more:
Macquarie adds 74 products to platform
Profile Financial Services adds to team
Cromwell launches European property fund
More rate cuts needed in 2017: Fiducian
Alternative funds gaining in popularity
