It’s the perennial question across all industries and sectors. Is bigger better?
When it comes to superannuation funds, the issue has been debated fiercely ever since 2009 when Jeremy Cooper, then chair of the Super System Review, suggested the “hypothetical situation” of just 27 super funds existing in 2025, the smallest with an average size of $50 billion.
For context, one of the largest funds in the industry, AustralianSuper, currently has $75 billion in funds under management. But of course, we are a long way off 2025.
Graeme Miller, director, investment services at Towers Watson starts the scale conversation like this: “The first thing to say is that every organisation, no matter what its size, will drive competitive strengths, and also competitive weaknesses, as a consequence of where it sits on the spectrum of size.”
In fact when it comes to investments, smaller funds may actually be at a competitive advantage, as they don’t have capacity constraints when it comes to investing.
“[We are] categorically of the view that scale delivers for members.” Paul Schroder, AustralianSuper
Because they don’t invest large amounts, they also don’t draw the attention of the market. However a $50 billion fund looking to invest a portion of that in an Australian equity strategy, would find it difficult to implement that without the market noticing.
“Smaller organisations tend to be able to employ capital much more quickly than larger organisations,” Miller says.
But AustralianSuper group executive, membership, Paul Schroder, says that their size gives them competitive advantages when it comes to investing in unlisted assets like infrastructure.
“Net contribution inflow is a fundamental driver – net cash flow allows funds to invest in assets and hold assets and extract that illiquidity premium through market volatility,” he says.
A fund that has a constant stream of members’ assets coming into it will not be forced to dispose of assets like infrastructure and property when markets are tough.
“...it seems clear that, generally, larger funds have a better prospect of higher net returns to members over the longer-term." Graeme Russell, Media Super
Schroder says at AustralianSuper they are “categorically of the view that scale delivers for members.”
For AustralianSuper it helps keep unit costs down, attract better talent and conduct advertising and branding that a smaller fund would find difficult.
“On the governance side, [size gives you] the ability to attract the best directors, the ability to attract the best talent, people want to become involved in funds that are large and growing,” Schroder says.
That doesn't mean there aren’t challenges, for example AustralianSuper now needs to look increasingly offshore for investments and has reached the point where it invests more in offshore equities than domestic equities.
“If you become too big in the domestic market you have to look offshore,” Schroder says.
Chief executive officer of the $3.5 billion Media Super, Graeme Russell, recently put together a discussion paper on scale for his board. It analysed administration costs, investment returns, insurance and products and services.
Based on his analysis Russell concludes that: "Smaller funds can still deliver top quartile returns at competitive fee rates – several have. And smaller, specific industry focused funds can provide very efficient and effective services, modelled for the workers and employers in their industry.
“Some large funds are, relatively, quite expensive – with fees considerably higher than a number of smaller funds. But it seems clear that, generally, larger funds have a better prospect of higher net returns to members over the longer-term."
“From an investment perspective we’ve always maintained the quality of the governance of the organisation is the most important [aspect] of the quality of investment outcomes.” Graeme Miller, Towers Watson
That view seems to be shared by many in the industry, but not all. Towers Watson’s Miller says there are better indicators of whether a fund will perform or outperform, not least of which is governance.
“From an investment perspective we’ve always maintained the quality of the governance of the organisation is the most important [aspect] of the quality of investment outcomes,” he says.
“In investing the ability to implement efficiently, the ability to make decisions quickly and to act upon those decisions, is actually hugely important.”
The bottom line is that it’s probably horses for courses, big funds can deliver scale which is great for some member services. But smaller funds can be more engaged with members and provide a better experience as a result.
The key, then, is for funds to realise what their strengths are regardless of size, and build on them, while working out strategies to deal with their weaknesses.