The industry fund rivals the retail giants of superannuation. How did it get so far and how has it changed?

Ian Silk made AustralianSuper’s strategy clear when the fund announced its merger with AGEST Super on December 14, 2011.

“AustralianSuper is determined to play a leading role in shaping the future of superannuation in this country in the interests of members,” the chief executive of the $43 billion fund said.

The deal, should it progress beyond due diligence, could increase AustralianSuper’s assets to $47 billion, making the nation’s biggest industry fund even bigger. AustralianSuper would compete more fiercely as the only industry fund vying for members with the retail giants of superannuation.

The AGEST merger followed AustralianSuper’s integration with the $3.3-billion Westscheme on June 30, 2011. The deals show how the fund has grown, through 14 mergers, to a size enabling it to compete with more than the usual industry-fund armoury of low costs, investments and group insurance. AustralianSuper’s simple strategy is “to be a large fund, a growing fund, and to exploit the scale benefits that size represents and deploy them for the benefit of members,” as Silk says. This strategic direction now sees it offer financial advice and more investment choices, similar to retail funds.

Silk expects AustralianSuper to be the only industry fund big enough to rival the largest retail superannuation managers. It competes with AMP, which manages $68 billion in superannuation and pension assets following its merger with AXA Australia and New Zealand. Bank-owned superannuation businesses are also competitors: Colonial First State, the Commomnwealth Bank of Australia subsidiary, manages $49 billion in super; MLC, which is owned by National Australia Bank, oversees $47.5 billion in retail super; ANZ-owned OnePath, has $34.3 billion; and Westpac-owned BT manages $59.8 billion.

“We think there are going to be six big national players. They won’t all be the best funds but they will be the biggest,” Silk says. “We’ve got to pedal really hard to compete in that company. Those institutions have growth strategies that involve acquiring members from this fund.”

Members who leave AustralianSuper for funds that better meet their needs “go with our blessing,” Silk says. But he believes major retail funds do not serve members’ interests as well as AustralianSuper. Losing members to them is not part of its plan.

Economies of scale

Andrew Inwood, founder and principal of CoreData Research, gets excited when he talks about AustralianSuper. “Make no mistake. This is one of the businesses that could revolutionise superannuation in Australia,” he says.

According to Inwood and other wealth management researchers, AustralianSuper’s fundamental services are impressive. The fund’s investment strategy, which allows it to shift capital across asset classes as valuations change, helped its balanced option return 6.13 per cent each year for the decade ending June 30, 2011. Members can gain financial advice about the fund’s 17 investment options and apply for up to $1.5 million in death and total permanentdisablement insurance without providing medical details. These services are bought for a weekly administration fee of just $1.50 plus a variable investment fee.

The fund has frozen its administration fee for the three years from July 1, 2011, for the 1.8 million members not in its corporate and pension divisions. The fund’s size and its decision to invest heavily in low-cost, index-tracking funds helped suppress costs. However, the retail funds have also found some fat they can cut from their fees: the CFS FirstChoice Wholesale Balanced option, for example, charges an annual fee of 0.99 per cent on investors’ balances, plus a transaction fee of 0.2 per cent.

New services make AustralianSuper more competitive with retail funds. It is trialling a partnership with six dealer groups to offer comprehensive financial advice that is compliant with incoming Future of Financial Advice (FoFA) legislation. By linking with the groups – Godfrey Pembroke, Matrix Planning Solutions, Dixon Advisory, Woods & Partners, Paul Moran and Switzer Financial Planning – AustralianSuper is spared the expense of hiring or training advisers. It also secures access to dealer groups before the new legislation (which will eliminate commissions on advised assets and threaten the profitability of some planning businesses) triggers consolidation, according to Andrew Baker, managing partner at wealth management researcher Tria Investment Partners.

“The big problem all the not-for-profit funds have is the loss of independent channels under FoFA and the accumulation of advice under banks,” Baker says.

The fund took further steps into retail territory by giving members more control over how their money is invested. The Member Direct investment option, launched on November 28, 2011, is AustralianSuper’s attempt to prevent wealthy members leaving to set up self-managed super funds (SMSFs). In the year to September 30, 2011, SMSFs gained $13.2 billion in assets to manage $397.2 billion, while total industry fund assets rose $4 billion to $241.9 billion. The option lets AustralianSuper members with balances of at least $10,000 invest their super in ASX300 stocks, exchange-traded funds and term deposits. These services, common among SMSFs, come at a minimum annual fee of $180. The average annual charge paid by SMSF trustees with $200,000 is $4600, according to consumer advocacy group CHOICE.

ME Bank, an institution owned by 30 industry funds including AustralianSuper, offers banking services like mortgages and transaction accounts exclusively to members in owner funds. Inwood says AustralianSuper’s executives and trustee board have capitalised on its size to rival big retail funds.

Success not measured by size

Fourteen recent mergers have given AustralianSuper opportunities to execute its business strategy.

“You can be a large fund and a poor fund. You can be a growing fund and a poor fund. Size of itself and growth of itself do not equate to success,” Silk says. “You need to capitalise on size and growth.”

The fund’s “chief advantage” over retail competitors is its ability to use its size to provide new services to members, Silk says. “We’ve walked away from many potential merger opportunities because we didn’t think we could exploit the potential benefits for members.”

Using data published by the Australian Prudential Regulation Authority on December 8, 2011, Investment Magazine calculates that AustralianSuper has about 3.36 per cent of assets in the superannuation system, and about 17.7 per cent of assets held by industry funds. AMP, on the other hand, has about 4 per cent market share. “There is enormous scope for increasing efficiency because of massive fragmentation,” Silk says. Mergers, and AustralianSuper’s status as a default fund for industrial awards, has helped it grow.

But the ultimate gauge of success will be its investment performance. “If we are going to be successful, we have to consistently produce strong net investment performance in relative and real terms,” Silk says. “Success won’t be measured by size alone.”

Blurred boundaries

Chief executive officer of SuperRatings, Nathan Macphee says that differences in the costs, service levels, investments and administration between industry and retail funds are narrowing. “Sooner or later the biggest difference between for-profit and not-for-profit funds will be governance structures,” he says.

Some low-cost industry funds have raised fees to provide more services, as retail funds launched simpler, cheaper superannuation products such as AMP Flexible Super.

“The segment boundaries are blurring; the terminology is no longer useful,” Baker says, while using industry jargon to describe what AustralianSuper has become – a mainstream retail player. Macphee acknowledges that AustralianSuper is still governed as an industry fund but executes services like its retail competitors.

However, Inwood’s description – “a full-service industry fund” – fits better.

“It’s an industry fund,” he says. “The moment it stops being an industry fund is if it starts paying profits to shareholders. But is AustralianSuper the industry fund most likely to compete outside its sector? Yes.”

The fund’s commitment to so-called equal representation governance, in which trustees represent employers and unions, cements its status as an industry fund, according to Silk. Its adoption of retail and SMSF-like services shows that it is “committed” to satisfying members’ demands.

Facing threats

AustralianSuper is the second most-recognised superannuation brand in the country, finds Forethought Research in work commissioned by the fund. Its television, billboard and print advertising campaigns have helped increase awareness of its brand, but AMP is far ahead at number one, the research shows.

The fund has not matched retail funds’ ability “to go to market,” says Inwood. “Retail funds are set up to make money. Growth is part of their business, but industry funds want to benefit members.” The so-called autoconsolidation legislation, to take effect in January 2014 as part of the SuperStream reform of superannuation administration, will automatically merge fund members’ inactive accounts with those they currently put money into. This will reduce the number of balances each fund has. Inwood says AustralianSuper must gain the attention of as many of the one in 10 Australians whom it counts as members before the new law is introduced.

“They have relationships with millions of Australians,” he says. “They need to make sure that they market to existing members intelligently.”

The large-adviser sales forces of retail funds also threaten to take members from AustralianSuper. MLC has 1864 financial planners operating under the company’s brand or through aligned dealer groups. ANZ employs 310 financial advisers and distributes investment products to 1200 aligned planners. Meanwhile, AMP’s 3427 planners in Australia helped bring $3 billion into AMP Flexible Super in the past year, adding to the $4.3 billion that the low-cost product has garnered since launching in May 20, 2010.

Industry funds traditionally gain new members through employer groups and unions rather than financial planners. But times are changing. AustralianSuper now promotes its investment services to financial planners as well as workplaces.

“It’s highly likely that two or three years ago an adviser would put an AustralianSuper client in CFS, AMP or BT,” says Macphee of SuperRatings. “Most financial planners require information and services that they haven’t got from industry funds. But AustralianSuper has built a channel to service advisers through the depth of their investment menu and administrative execution.”

The fund has lost wealthy members who have sought the freedom of investment choice provided by SMSFs. Unlike in the early days of industry super, “members are no longer homogenous,” according to Baker. Some of them have accrued large balances and have complex financial affairs. “The changing nature of members is an issue for all industry funds,” he says.

However, one function in which retail funds outshine AustralianSuper is member administration, which among other services includes call centres.

“It is one of the best funds in the country but its Achilles heel is its administration,” Macphee says. AustralianSuper is rated as being “In the fast lane” by SuperRatings in five of the six criteria used in its Fundamentals analyses (that is investments, fees, insurance, advice and education and governance). The fund’s administration is rated as “cruising” or close to benchmark.

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“A handful of people have been pivotal in the early success and modern transformation of AustralianSuper,” explains Silk. Trade unionist Bill Kelty was director of the Australian Retirement Fund (ARF) and the Superannuation Trust of Australia (STA) for more than 10 years. The funds merged with FinSuper to form AustralianSuper in 2006.

Kelty, a former secretary of the Australian Council of Trade Unions, advocated that the funds invest in unlisted assets such as property, infrastructure and private equity. Such investments now characterise the asset allocation of many industry funds.

“His legacy still remains in key elements, including our approach to investments,” Silk says.

Elana Rubin, chair of the fund and former investment manager at ARF, has overseen the development of AustralianSuper into a more sophisticated financial institution. Bernie Fraser, a former governor of the Reserve Bank of Australia (RBA), was “an active, hands-on chair of the investment committee” who exerted a “totemic influence” on the fund until he stepped down in June 2011.

“His fingerprints are all over the investment performance of the fund for a decade,” Silk says. “For someone who didn’t have a long career as a professional investor, his macroeconomic experience and feel for markets means that he had an uncanny sense of the direction of markets.”

Silk points out that Fraser, who governed the RBA from 1989 to 1996, guided the fund and two of its predecessors, ARF and STA, through the following crucial asset allocation decisions:

• April 2003: the fund bought equities in the final days of the bear market caused by the dotcom crash and September 11, 2001 terrorist attacks on the US.

• October 2007: the fund sold equities and invested new cash flows in cash before the US sub-prime mortgage crisis triggered the 2008 credit crunch.

• April 2009: it invested in equities when markets rallied on confidence that major central banks had eased the financial crisis caused by the collapse of Lehman Brothers. “Whenever we made big calls, he was usually the driving force,” Silk says. Superannuation is a long-term investment. Time will tell whether AustralianSuper members will benefit from these calls.

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