Sicilia prefers to talk to Hostplus’ asset consultant, JANA – which has investment strategy and manager research teams – about the opportunities available to the fund. The consultant is experienced and Hostplus can benefit from its successes and mistakes, he says. Sicilia does not know how big Hostplus will be when it outgrows its sweet spot. But he is certain that its investments will suffer when it does. “There has to be a point where a fund becomes so big that its size is detrimental to the investment case,” he says. Delaney disagrees. He says funds strike the sought-after sweet spot when their strategies work harmoniously. This can happen regardless of their size. “It can happen for small, medium or large funds,” he says. “But consistently, larger funds can operate more cheaply than smaller funds and have more resources. That’s unambiguous. “Our performance will be good or bad depending on how skilful we are at getting the right strategy for the fund.” Delaney says AustralianSuper has never been unable to invest in a strategy or manager because it is too large or will force a manager to breach their capacity constraints.
To illustrate the point, he says that in 2002 managers of Australian smallcap equities said they could not beat the index while managing more than $200 million. “Now they manage five times that amount,” Delaney says. “So it has always been an issue and isn’t materially worse now than it has been.” He shrugs off concerns that AustralianSuper’s size causes a detrimental market impact when it executes investment decisions. Public and unlisted investment markets in Australia and overseas are easily large enough to absorb the fund’s capital without difficulty, he says. However, Jack Gray, principal of consultants Rawson East and a director of placement agent Brookvine, says market impact is a real concern for the world’s bigger institutional investors. “When you get to a certain size you have market impact,” Gray says. “That is a well-known diseconomy of scale.” Gray consults to APG, the $375 billion Dutch pension fund. “Almost every deal is too small to have a significant impact on [fund] returns,” he says. Delaney says his use of active managers has not changed since the days when he managed a $3 billion portfolio at one of AustralianSuper’s predecessors.
Then, ARF indexed half of its Australian equities portfolio; now, AustralianSuper does the same. He does not believe that big funds should abandon active investment strategies and focus exclusively on managing beta risks. “A large chunk of performance comes from asset allocation and sector tilts. That is always the case,” Delaney says. “But if you are skilled at manager selection it is a material value-add, and if you aren’t it will detract.” Larger funds may have opportunities to negotiate preferential access, fees and terms with unlisted asset managers, but smaller funds are better positioned to invest more frequently and profitably in boutique funds managers, Gray says. “If you’re a small fund you don’t necessarily have disadvantages as you may be able to get in to a new fund manager that may become very successful,” he says. “A big fund may not be able to get in because of capacity constraints or because they don’t want to invest in a new manager.” Much research and investor experience demonstrate that smaller investment mandates deliver better returns. An April 2010 research paper, Pension Fund Performance and Costs: Small is Beautiful, written by Rob Bauer, Martijn Cremers and Rik Frehen, assesses this in its comparison of the performance and costs of large pension and mutual funds.
