Funds pushing back against ‘scale benefits’


Comment by Greg Bright

It may seem like a small sample – just 50 investment professionals of big super funds, plus a sprinkling of consultants and managers – but it signifies what appears to be a growing movement to push back against the merger trend promoted by APRA and some industry commentators.

The question: “In a world of APRA fund consolidation, small-sized funds should: a) merge or be acquired; b) outsource to implemented consulting, or; c) stay small and try to be innovative or focused.”

The answer: “41 per cent say ‘merge’; 2 per cent say ‘outsource’, and; 57 per cent say ‘stay small’.”

This is a big issue for super funds, particularly not-for-profit funds which seem to be bearing the brunt of the APRA pressure to merge. The funds, after all, are the custodians of their members savings for retirement. They have a fiduciary duty to act in the interests of those members. Their views should not only count, they should count the most.

APRA’s duty is about the governance of those funds and their efficient operation. Its support for, and implementation of, the MySuper regulations, which have led to more than 80 per cent of commercially operated big super funds embarking on new passive strategies for a majority of the assets in their default options in order to get headline costs down (according to a study by Chant West), has raised industry concerns. Is the discussion about ‘scale’ going to be any different? APRA reports to the Federal Government, not to the nine-or-so million members of big super funds.

The i3 survey was taken earlier this month at an Investment Strategy Forum in Torquay, Victoria, for fund CIOs, organized by the conference producer Investment Innovation Institute (i3).

Of the 90 people at the conference, more than 50 voted in a straw poll on the issue, according to Teik Heng Tan, the company’s founder and chief executive.

“I thought it was a good issue to ask about,” he said. “All the commentary seems to be about the benefits of scale. But it would be good to hear from the funds themselves on what should be the future for smaller funds… What should small funds do?”

Teik said that the annual conference had featured a series research papers by academic and former asset consultant Geoff Warren. The first of these was on long-term investing, done in association with the Future Fund. The second was on the insourcing/outsourcing debate. And the third, this year, was about capacity management.

Capacity is related to scalability, which is related to the desirability, or otherwise, of smaller funds merging into their larger cousins. We all know, for instance, that in mainstream asset classes, such as Aussie equities, big is bad.
It may well be, too, that, following recent trends, funds getting into asset classes such as listed infrastructure are paying a new ‘control’ premium which did not exist several years ago. Listed infrastructure, so some managers believe, is now cheaper than unlisted for exactly the same investments. This is clearly an anomaly brought about by demand from big investors.

Teik said that, while the conference was all about investments, there were several comments from super fund executives too questioning the benefits of scale in other areas of super funds’ businesses, including administration and operations.