This has become, and will continue to be, an increasing issue for those large superannuation funds competing aggressively for growth – especially if they do not have the business structure to support their planned expansion. Increasing the choice of investment options, the range of products and services, as well as corresponding promotional activity, requires an equivalent increase in skills and resources across the business to maintain the same quality of service. So why it is generally accepted – or at least not openly brought into question – that large superannuation funds are best placed to outperform small superannuation funds solely by virtue of their size, when this continues to be unsupported by industry investment performance data? How does complexity aris e? Investment strategy complexity arises over a period of time, but generally as the fund’s FUM and profile grows.

The competitive nature of the industry compels these funds to seek better investment performance and develop an investment strategy that is regarded by the industry as leading-edge and, perhaps, globally competitive. This is most often observed in the increasing complexity of the portfolio construction process, in areas such as the following.

• Size of the global investment universe has increased, particularly across the property, private capital and liquid alternatives asset classes and become a prominent component of larger funds’ strategic asset allocations. The corollary to this development is that the opportunities are generally unlisted and introduce illiquidity, valuation and governance issues.

• Boutique investment managers have replaced established investment managers through a strategy of investing in, or “incubating”, new Australian and overseas boutique managers. This was built on the view that they are better skilled, more nimble and structurally more efficient in implementing decisions than traditional managers; so more likely to generate alpha.

• Number of investment managers employed continues to increase as large funds are limited in making the desired percentage allocation to their preferred managers due to capacity issues and the need to diversify manager business risk. This may eventually result in employing too many managers and achieving very expensive index performance.

• Capacity constraints may arise in alternatives and less liquid sections of listed markets, which compels larger funds to seek more investment opportunities. In addition, the minimum allocation for an opportunity to meaningfully contribute to performance increases. These constraints will ultimately limit the investment universe the fund has actively sought to expand.

• Large in-house investment teams have been developed to identify global and alternative investment opportunities, manage fund assets internally and leverage this in-house capability across the investment strategy. It has led to the increasing use of strategies akin to those offered by investment managers. Having such large teams may compel the fund to invest in, or have exposure to, certain (illiquid) asset classes even if valuations are unattractive.