New APRA analysis suggests big retail superannuation funds are missing out on economies of scale that their size should give them, unlike large not-for-profit funds.

Not-for-profit superannuation funds’ clean structures and ways of lowering investment costs mean they benefit more from consolidation than their bank-owned competitors, analysis by the prudential regulator shows.

Multi-billion-dollar not-for-profit funds show a “size-related advantage” by achieving better net investment returns at lower costs than their smaller peers, states the Australian Prudential Regulation Authority (APRA) in a recent working paper analysing the returns of 280 funds.

However, such economies of scale are not evident among the largest bank-owned retail funds, which exhibit marginally higher investment costs while delivering lower returns, Effect of fund size on the performance of Australian superannuation funds, released March 26, reports.

From September 2004 to June 2010, members of the largest not-for-profit funds gained a net investment return of 112 basis points more than members with similar balances in the smallest funds. Not-for-profit funds include industry, public sector and some corporate schemes.

The average difference in net returns between the largest and smallest not-for-profit funds was 75 basis points each year. The largest retail funds, however, have “lower and more volatile returns” and were beaten by their smallest peers by an average of net 80 basis points each year.

“Fund members are likely to benefit from further consolidation in the not-for-profit sector,” the report, written by James Cummings of APRA’s policy research and statistics division, states.

Scale benefits accrue when not-for-profit funds grow to a multi-billion-dollar size and are not exhausted by Australia’s largest funds, the paper states.

 

Platform problems

 

The platform structures of many retail funds can explain their lagging performance, the paper says. Platforms are used to sell and administer “hundreds” of investment choices blended by investors. Retail funds offer an average of 248 investment strategies to members. In contrast, not-for-profit funds provide an average of 11 options because they manage portfolios with asset allocations controlled by trustees, not individual investors.

“The outcome of this approach is that a retail fund is often simply an aggregation of many separate investment choices, rather than a coherent investment strategy for a pooled set of assets,” the paper states. “There is limited opportunity for the trustees of the fund to shift resources towards asset classes for which scale and negotiating power matter.”

Not-for-profit funds can combine assets to invest in a broader range of investments, such as property and private equity, to improve investment returns, according to APRA. The low investment-expense ratios paid by the largest not-for-profit funds also suggests they use the weight of pooled assets to negotiate cheaper fees and better contractual protections.

Simon Mumme became a fnancial journalist through a stroke of luck. Upon graduating with a Master of Journalism from The University of Queensland in 2006, he set out to fnd a news organisation that would employ him as an overseas correspondent or business reporter. Or both, ideally. Conexus Financial hired the bright-eyed cadet, and in the ensuing years he wrote for all of its titles until being appointed editor of Investment Magazine in June 2010. Under his guidance, the magazine continues to dominate the Australian institutional investment media through its authoritative, insightful and engaging feature stories and analysis. Outside of work, Simon trains keenly in Muay Thai kickboxing, revels in the surf breaks fringing the Sydney coastline and reads as much high-quality journalism and non-fiction writing as he can. Committed to his role as a niche business reporter, Simon is aware that an overseas posting as a correspondent still eludes him. He hopes Conexus can help him with that career goal too.
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