Mega super funds way of the future

BIGGER, fatter and fewer superannuation funds are coming, like it or not, with the amount of funds tipped to more than halve as mergers and takeovers create a new breed of mega-fund.

The super sector is bracing for the next round of royal commission hearings with several problems expected to be flushed out, including a lack of mergers by underperforming funds and the focus on selling insurance products instead of retirement savings.

There are 224 managed super funds in Australia with analysts expecting the total to shrink to about 100, as underperforming and smaller funds amalgamate in search of higher returns and lower fees.

Research company SuperRatings says the sector could be dominated by a “Big Four or a big six” mega funds, following in the footsteps of banks. However, the merger forecast is not a death knell for all small funds. Those that remain are set to thrive in other aspects.

Smaller funds have already realised the trend and are starting to refine their offer by providing an extra high level of service and to cater to specific workplaces and industries.

But, to date, big appears to be best for super funds, with the statistics showing the biggest funds also have the highest investment returns.

Analysis by research company ChantWest found the average return from large funds (more than $20 billion) was higher than small funds (under $5 billion) by almost 1 per cent a year in every investment time period in the past 10 years.

“Small funds are overrepresented in underperforming funds, compared with large funds,” Chant West head of re- search Ian Fryer said. “Scale is quite important, especially for funds under $1 billion, it’s hard to see how they can compete against bigger funds. When you look at the performance of larger funds versus smaller funds, the larger funds are definitely well ahead.”

Mr Fryer said larger funds often got a better deal on investment fees and could access a wider range of investments.

“They can even make direct investments themselves such as buying a big shopping centre or toll road or airport,” he said. “Scale gives you access to more opportunities.”