Size is “not an automatic win” for superannuation funds and comes with significant disadvantages and challenges, according to Geoff Warren, director of research at The Conexus Institute, challenging prevailing wisdom that greater scale necessarily delivers better outcomes for members.
Policymakers should “drop the ‘size is good’ mantra” and rather look at whether funds–large or small–are playing to their competitive advantages, said Warren, presenting new research findings at Conexus Financial’s Fiduciary Investors Symposium held in Sydney’s Blue Mountains region.
Increasing scale does have some clear advantages, Warren said. It brings down costs per member, allows funds to internalise investment functions and provides the scope to “do more things” like implement retirement strategies. It also enables funds to access better opportunities in private markets.
But less discussed are the disadvantages that also come with scale, he said. Larger funds outgrow market segments such as small cap or even mid cap companies in public markets, and become increasingly reliant on passive investments. They also face increased bureaucracy and reduced flexibility.
Sourcing attractive assets also becomes a major challenge, and the availability of these assets varies with economic cycles. “If you try and buy infrastructure, there’s a lot of competition out there for infrastructure assets,” Warren said. “If you’re trying to go into private equity, you are competing with a lot of dry capital.”
Building the capability to exploit investment opportunities available to bigger funds–such as gaining expertise in private markets, building out internal management and expanding internationally–involves “major challenges to get right and…some funds possibly will get wrong.
“So it’s a balance here,” Warren said. “There’s no clear indication out of this that size is good or bad. It’s how you actually implement It.”
Smaller funds on the other hand have higher unit costs as they do not have the economies of scale enjoyed by bigger funds, Warren said. They face greater challenges identifying and accessing opportunities and need to rely more on external managers. Scale and system-based services are harder to deliver. And they face an ever-increasing regulatory burden which has become too much for some to manage.
But they are “not without their advantages as well,” with the ability to “play in areas that large funds can’t play” and co-invest in collective vehicles to gain access to bigger opportunities. They also beat the larger funds in terms of the closeness and trust they build with members through face-to-face interactions, he said.
Elizabeth Kumaru, head of private corporate assets at Australian Retirement Trust–a $240 billion fund—said she is a believer in the value of scale, but Warren’s paper–titled: ‘Do superannuation fund members benefit from large fund size?’–was “very, very sound” in its research.
Scale can help achieve operational efficiencies, Kumaru said, but “you need to make sure…that you have the right people, the right governance frameworks, in order to enable you to create that efficiency.”
ART has also created a C-Suite role that is “chief of retirement,” demonstrating the ability of a larger fund to focus on retirement strategy, build products and “invest in the team, the resources and staff and to attract the right talent in order to address these issues” while keeping fees low.
Scale is a “really good talent sourcing tool,” Kumaru said. “The good part of the role is to be able to go source good opportunities, identify and get involved in the market. So that growth profile is an incredible talent attractor and retainer, and a competitive advantage.”
Seamus Collins, CIO at the $13 billion Mine Super, noted the fund is undergoing a merger currently and so is conscious that “you need to have a level of scale and growth to continue to deliver for members.”
But smaller funds have the ability to offer specialised offerings, Collins said. Notably Mine Super offers insurance for members working underground and using explosives, he said, and is “the only game in town for a very specialised occupation.”
Large funds are doing an outstanding job, he said. “The question [for small funds] is whether you are doing a different job, and maybe not being able to quite implement and get that fee efficiency and that capital efficiency, whether that’s justified,” Collins said.