There has been considerable public discussion from Australia’s largest superannuation funds on how they benefit from economies of scale that enables them to outperform their smaller industry peers. In this article PAUL KESSELL discusses how small superannuation funds also benefit from utilising their size to their advantage.

 

While Australia’s large superannuation funds tend to attract the media spotlight, there is less focus on the inherent structural advantages that ensure smaller superannuation funds remain just as attractive, especially when it comes to achieving strong and competitive investment performance. One benefit of large size is undisputed: the largest super funds have the capacity to cultivate a high profile in the media and at conferences. It would, therefore, appear intuitive that the well structured delivery of this branding strategy would be transferred across to their assertion that economies of scale lead to superior investment returns. However, I would argue that it is not just a one-way street, and that large funds face certain challenges as a result of their size, while many of the characteristics of smaller funds allow them to perform as well as, or better, than their larger counterparts.

The challenge of complexity Large superannuation funds often have high profile trustee boards, significant funds under management (FUM), positive cashflows and large internal investment teams employed to review their broad range of global investment opportunities. Even though an increasing level of FUM does offer economies of scale, there is little, if any industry agreement about the point at which the benefits of this scale are optimised. In other words, are funds aware of the FUM “sweet spot” beyond which scale advantages erode and unwelcome and unwarranted complexity emerges? As FUM grows, the economies of scale benefits to the investment strategy may initially arise from the ability to invest across a broader investment universe, achieving lower investment fees and developing a greater in-house investment skill-set to produce improved investment performance.

However, the initial benefits of scale cannot continue indefinitely. Ultimately, the economies of scale that have been achieved across the business will eventually be reduced or lost due to the ‘cost of complexity’ that manifests across the fund’s operations. This complexity can develop over time and may not be identified until it has become excessive and already embedded – affecting the fund’s strategic plans, structures, processes and systems. The complexity may not easily be reversed and, unless actively managed, is likely to have an adverse impact on investment performance. This would seem to be consistent with Parkinson’s Law, a management theory that states “work expands so as to fill the time available for its completion”. Such a scenario is generally avoided in small superannuation funds due to natural limitations on their level of resources.

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