Why do a lot of funds merge?
Well, according to Mercer’s President Pacific Region and CEO Australia, David Bryant, they do it basically because they think they have to be bigger to be competitive and he said that’s true… but only to a point.
In his opinion, after a particular critical mass had been reached, there did exist perfectly-sized funds but they’re not necessarily the biggest.
“If you look at say, a fund of $300, $400 billion, the problem is it’s very difficult to move the needle on investment, that’s why we’re seeing, to be frank, a lot of crowded trades around things like infrastructure, whether it’s ports, airports, toll roads or energy generation,” he said.
Bryant said that as funds grow, they go through a process of various levels of scale and efficiencies and while he’s not saying that size doesn’t matter he is saying it’s only a relative measure of success.
“At $5 billion you struggle to get into the game with various things, so the observation that you need to be bigger than ‘X’ is true,” he said.
“At $30, $40, $50 billion, you’re probably in a fantastic spot. You’re big enough to take, either individually or directly, different deals that are going around. You can still explore areas of alpha generation.”
But he said the challenges start to re-escalate when you hit $100 to $150 billion partly because of the limited size of the Australian market and the need to start finding more opportunities.
He maintained that being big enough and dominant enough in Australia in what’s becoming an increasingly crowded market only gets you so far.
The problems of going global
The next logical step according to Bryant was to look outside the local market and go global but that in itself represented challenges.
“How do even our biggest funds at say $200 billion go global? What are they allocating… $60, $70 billion globally, spreading that between listed and unlisted markets? They’re trying to cover the globe, that’s very difficult,” he said.
“So I do think there’s room for funds of different sizes… the challenge [though is] they need to become a little bit less wedded to how they’ve done things in the past and they need to use their buying power well.”
He said what a lot of funds can do is get investment services from, say, one provider, get consulting somewhere or administration or digital services somewhere else, for example, and what that enables them to do is to re-assert the essence of “why they are there” in the first place, get back to their original point of difference in the marketplace.
“We talk to all sorts of funds that are based around employers, geographies, industries, faith-based funds (churches and charities) as well,” he said.
“The discussion with them is, ‘remind me again, why do you exist’? You’ve really got to get back to first principles. And [what you find is] they don’t really want to merge away their character and their identity, but they feel pressured to do it because they don’t have access to scale,” he said.
Bryant’s point is there are other institutions, Mercer included obviously, which can help those funds gain access to that scale, what the funds need to be concentrating on is to differentiate the things that are critical to their character and purpose.
So in response to the question, ‘what is a perfectly sized fund’? Bryant believes It can be any number of things depending on your objectives and what you what you want to achieve or, more specifically, what you want to achieve for your members.
So what will the future look like?
Bryant pointed out that while he saw a place for funds of all sizes in Australia’s future super landscape he didn’t maintain that that landscape wouldn’t be substantially different to today’s.
The recent changes to stapling rules will definitively change the way funds acquire members.
“Under stapling you now have your first fund for life… theoretically… you can change, but it’s a lot more onerous to do so,” he said.
But there will be an important technological caveat at play particularly amongst the younger-member cohorts.
“Younger members will now go to funds through online experiences,” he said. “And whether it comes with more of an ethical investing lens or whatever, the pathways to [entry to funds] are going to change. Employers will still be relevant, industry awards will still be relevant but it will shift.”
So when Bryant thinks about what are the funds of the future, front of mind are funds that don’t yet exist.
“One of the partnerships we have is with Virgin and those types of partnerships are going to be very important in the future of superannuation,” he said.
“Interestingly they have low barriers to entry. Yes, you need a license and so forth but if you’re very good at online distribution, then you can set up a fund pretty well tomorrow.”
“So I think about what would, say, ‘Amazon Super’ look like and in a $3 trillion market there’s enough there for an Amazon to think, ‘hang on, I could partner with someone’ and they would never build the back office, they’re going to get people to do the investing, administration and other things, but they will do the member acquisition and they will drive the member experience. So competitors will come, they will just come from a different place.”