Mega su­per­an­nu­a­tion funds are on the hori­zon

Herald Sun - - BUSINESS DAILY - ka­­ry­

In the big pic­ture, the sec­tor could end up like the bank­ing regime SUPERRATINGS FOUNDER JEFF BRESNAHAN

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

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

Over­all, 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 in­vest­ment re­turns and lower fees.

Ac­cord­ing to in­de­pen­dent re­search com­pany SuperRatings, the sec­tor could even­tu­ally see the dom­i­nance of a “big four or a big six” mega funds, fol­low­ing in the foot­steps of the bank­ing in­dus­try. 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 — those manag­ing more than $20 bil­lion — was higher than small funds (un­der $5 bil­lion) by al­most 1 per cent a year in ev­ery in­vest­ment time pe­riod dur­ing the past 10 years.

“Small funds are over­rep­re­sented in un­der­per­form­ing funds, com­pared with large funds,” Chant West head of re­search 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.”

Large funds also typ­i­cally have more in-house ex­per­tise such as a team of in­vest­ment ex­perts, com­pared with smaller funds which may rely on just one or two peo­ple or pay an out­side as­set con­sul­tant for the ad­vice.

How­ever, SuperRatings founder Jeff Bresnahan said larger funds are not with­out their is­sues and can be slow to change and adapt.

Some larger funds would also ben­e­fit from merg­ing but have so far failed to do so de­spite it be­ing in their mem­bers’ best in­ter­ests, he said. “I ex­pect the pace of merg­ers to in­crease,” Mr Bresnahan said.

“In the big pic­ture, the sec­tor could end up like the bank­ing regime, pretty much be­tween a big four or a big six ma­jor funds and then you would have a se­ries of oth­ers that have a ge­o­graph­i­cal or in­dus­try-based ad­van­tage, cater­ing for spe­cific de­mo­graph­ics or ge­ogra­phies, also a bit like credit unions com­pared with the big banks.”

Mr Bresnahan said an ar­gu­ment could be made that funds will get so big they will find it dif­fi­cult to out­per­form av­er­age re­turns.

“They will have to buy in­vest­ments in such huge amounts that they will strug­gle to make them mean­ing­ful,” he said.

“A $100 mil­lion in­vest­ment to a small fund is mas­sive but $100 mil­lion to a large fund won’t re­ally move the nee­dle. They would need to find 10 of those in­vest­ments to nudge their per­for­mance.”

Sev­eral funds have al­ready had ten­ta­tive merger talks but have failed to go ahead af­ter eye­ing each other off as po­ten­tial joint board mem­bers.

“Some funds should have merged and haven’t and I think the royal com­mis­sion will flush some of that out,” Mr Bresnahan said.

“The rea­son in a few iso­lated cases, just anec­do­tal, is per­haps direc­tors or trus­tees have put their self in­ter­est ahead of their mem­bers. Af­ter all, when you have two trus­tee boards there will be a lot of di­rec­tor po­si­tions lost, which board re­tains their chair­man or who gets the chief ex­ec­u­tive gig?

“With pres­sure from the Pro­duc­tiv­ity Com­mis­sion for merg­ers and, al­though we’re yet to see the out­come from the royal com­mis­sion, we can pretty much guess there will also be pres­sure there for funds to im­prove gov­er­nance and or to merge.”

The As­so­ci­a­tion of Su­per­an­nu­a­tion Funds of Aus­tralia (ASFA) said merg­ers must be based on the best in­ter­est of mem­bers.

“There are many fac­tors fund trus­tees might con­sider — are there syn­er­gies be­tween the mem­ber bases; will costs be re­duced; will mem­bers re­ceive a higher level of ser­vice; and will in­sur­ance ar­range­ments be suit­able,” ASFA chief ex­ec­u­tive Martin Fahy said.

The cost of due dili­gence, fi­nan­cial, tax­a­tion, le­gal and com­mer­cial trans­ac­tions, as­set trans­fers, in­te­gra­tion costs, the merger of data­bases, com­mu­ni­ca­tions to mem­bers and the change to in­sur­ance and ser­vices all in­volve time and cost be­fore and af­ter a merger.

“Scale alone does not nec­es­sar­ily de­liver,” Dr Fahy said.

“Smaller funds can be nim­ble, re­spon­sive to mem­ber needs and tai­lor ar­range­ments to be suit­able for their par­tic­u­lar mem­bers — fac­tors such as oc­cu­pa­tion and ge­og­ra­phy. Ad­di­tion­ally, there is a point at which any ben­e­fit from economies of scale [be­comes] neg­li­gi­ble.”

Su­per­an­nu­a­tion merg­ers must be based on the best in­ter­ests of the mem­bers.



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