The investment firepower and cost savings promised by economies of scale have enraptured the Australian superannuation industry. This has instilled in some funds an urge to merge in order to enjoy the benefits of being large. However, some investment chiefs believe that bigger size brings a new set of problems that can undermine performance. SIMON MUMME reports. The quest of many superannuation funds, to create optimal investment strategies at the most reasonable cost, has spurred some of them into mergers to reap the benefits of being large. Big funds can, for instance, staff more investment professionals to research investment opportunities and risks more thoroughly; use their size to access strategies run by highly sought-after investment managers; negotiate lower fees and preferential commercial terms with service providers, such as fund managers, custodians, administrators and wholesale insurers; and internalise operations that were previously outsourced to these providers. Bigger size gives transformative opportunities to funds. “Scale is seductive,” admits Sam Sicilia, CIO of the $10 billion Hostplus. But the fund is resisting this siren song until it sees incontrovertible evidence that size is crucial to investment excellence in superannuation. All debates about scale in Australia refer to the operations of the nation’s largest defined contribution fund, the $42 billion AustralianSuper.

Ian Silk, CEO of the fund, has overseen its attempts to exploit the benefits of the decreasing unit cost of its operations as the fund has grown. He has learned that size, by itself, is worth nothing. Silk says the revered benefits of scale in a competitive investment market do not come automatically with increased funds under management. “We have the latent potential. But the question is whether you can exploit it for stakeholders,” he says. Doing so requires investing in skilled people, resourcing them with the technology and systems to extract scale benefits and then making sure it happens.

bullseye Mark Delaney has first-hand experience of how greater scale can impact an investment portfolio. He managed investments for the $3 billion Australian Retirement Fund (ARF), which merged with the Superannuation Trust of Australia to form AustralianSuper, at which he is CIO and commands a $42 billion portfolio and a team of 30 investment professionals. The greatest difference between then and now, he says, is having more staff to deeply research markets, evaluate investment opportunities more thoroughly and implement portfolio decisions more efficiently. The portfolio has grown immensely and includes a much broader range of assets, but Delaney now has a greater understanding of how it functions – and its potential. “Greater team depth gives us the chance to do more strategically, including sector tilts, because you’re not as rushed running from one job to another,” he says. Michael Dwyer, CEO of the $30 billion First State Super, which cemented its merger with Health Super in July, says the fund’s newfound scale will drive down the already “rock-bottom” fees it charges members – such as the 50 basis points it charges members in its balanced option. But better returns can’t be guaranteed.

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