• Internal stakeholders have increased in number requiring greater operational and management control to ensure all investment activities are aligned with the fund’s strategic investment strategy. More stakeholders produce internal competition for access to the fund’s limited risk budget and capital allocation and may result in a sub-optimal investment strategy. These complexities require a more active management approach by the fund and additional internal resources and fixed-cost funding that are forcing increases in the administration fee imposed on members. They also come with higher fee structures that may offset some, or all, of the ‘economies of scale’ benefits that had previously been achieved. Limited transparency makes it is difficult to assess the value each of these activities adds to investment performance. Investment strategies, and their associated complexity, have developed at a faster rate than the investment governance policies of many large funds.

This has created a potential knowledge gap between the inherent sophistication of the investment strategies employed and how well they are understood by the trustee board. It imposes increasing demands on trustees and their ability to make informed investment decisions. Such factors inevitably add to a lengthening of the decision-making process – from idea generation to trustee board approval and implementation – resulting in an opportunity cost and creating the risk of sub-optimal investment performance relative to the resources, scale, capabilities and innovation the fund has applied to the investment strategy. The decision-making process is one that perhaps demands more attention by the industry.

I would argue it is fundamentally important to have a decision-making process that enables trustee boards to clearly focus on investment strategy rather than operational issues. Notwithstanding, prima facie, large funds are better placed than small funds to provide a broader range of services and implement an investment strategy that generates consistently strong investment performance. However, scale of itself is not sufficient; there needs to be a clear process as to how best to capture the benefits of this scale. Only recently have the large funds acknowledged they could be more proactive in pursuing lower fees from their service providers. A couple of other areas where large funds may achieve scale benefits are the broader range of investment opportunities they are presented primarily, due to the ability to make large investment commitments, and the access to a wider range of information sources that can feed into the investment management process.

However, unless this greater choice translates into better investment performance it simply increases complexity and inertia. By comparison, smaller funds have generally implemented investment strategies that are much less complex and this gives them a powerful advantage. I also assert that small funds have the capacity, resources, skill and governance structure to effectively compete with their larger counterparts. The trustee boards of the smaller funds continue to retain a close industry connection with their fund’s members. This promotes an alignment of interests with members and supports a robust and high-quality investment governance policy framework. Importantly, the parameters of this governance policy are broader than the complexity of the investment strategy.