The big super funds will continue to get bigger and the small keep getting out, but mergers among funds will not necessarily lead to sustainable benefits from scale, the Fund Executives Association Ltd (FEAL) annual conference was told last week.

The conference, which attracted a record 275 attendees, discussed the three related issues of branding, fund features and scale. John Evans, associate professor at the University of NSW, said the evidence was that funds could extract more value if they went from being small to being large, however, there was not much value add in going from small to medium sized. “Smaller funds are the most unlikely to survive,” he said, “because they won’t be able to offer competitive prices on a sustainable basis and they can’t afford brand loyalty programs.” He said: “You’re in a transaction business and being small is not a good place to be.” Funds operating in industries which tended to have high turnover of staff needed to be larger than others but not-for-profit funds did have an advantage over commercial funds because they could pass on the “profits” back to members. He said that, increasingly, it was in the areas of distribution and marketing that most benefits from increased scale could be derived. With investments, there were potential “benefits of scope” from size, according to Jack Gray, global investment strategist with GMO, but there were also disadvantages. An example of the advantage of scope was for very large funds to set up their own investment banking operations. Greg Vaughan, the managing director of WestLB Mellon Asset Management, said that the commercial interests and the clients’ interests were in conflict “from day one” because of traditional asset-based fees. It became more difficult to provide outperformance, particularly in Australian equities, as funds under management grew. Vaughan said that the use of performance fees was “clearly the way to address the issue”. Gerard Parlevleit, the chief executive of the Commonwealth Bank staff super fund, said that funds could explore alliances instead of mergers as a way to retain outperformance in investments to enable spending elsewhere. Bruce Watson, the chief executive of AusCoal, which is the result of a merger in 2004 between the NSW and Queensland coal industry funds, said that the members of the Queensland fund benefited from a 37 per cent drop in the management expense ratio post merger and members of the NSW fund from a 17 per cent drop. Alan Schoenheimer, chief executive of Russell Investment Group, said that no-one in Australia had achieved true scale in transaction processing. “A lot of you will find you’re at the flat part of the curve for economies of scale,” he said. And, from his own experience from the merger of Russell and Towers Perrin, he said that most of his time during the merger was dealing with people and cultural issues rather than costs and service providers. The Fund Executive of the Year Award, announced at the annual members dinner the previous night, went to Paul Watson, the deputy chief executive of MTAA Super. The Award, sponsored by AMP Capital Investors, carries a $20,000 study grant. It was also announced that Howard Rosario, chief executive of Westscheme, would be nominated as the new chair of FEAL at the annual meeting in November, following the retirement of Brett Westbrook, chief executive of Future Plus, from the position. Michael Baldwin, FEAL chief executive, said feedback from the conference was very positive.

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