APRA also found there were no economies of scale evident in the investment expenses of retail funds. One explanation is that, because retail funds are more likely to outsource their investment management to related-party fund managers than industry funds, larger retail funds may be forgoing the ability to negotiate more favourable terms on investment management contracts. Larger retail funds were found to benefit from spreading fixed operational costs over a larger asset base, but they didn’t realise any reduction in variable costs from administering larger member balances.
“The structure of retail funds, in the sourcing and offering of their investment products, is less conducive to capturing the benefits of scale. Consequently, the merits of industry consolidation are not evident in the retail sector,” concludes APRA.
By all accounts, most superannuation fund types – including self-managed superannuation funds, industry funds and retail funds – are only going to get bigger as funds pour in and consolidation continues.
An increase in the superannuation guarantee levy from 9% to 12% will be a major factor behind total assets in the superannuation sector growing to almost one-third larger than Australia’s annual GDP by 2019, up from 95% of GDP or $1.38 trillion now, says research group CoreData Consulting.
In its white paper, Survival of the Fittest, CoreData predicted that by 2020 the number of funds in the Australian superannuation industry would shrink by up to 40%. Presently, there are approximately 362 superannuation funds in Australia, spanning the retail, public, industry and corporate superannuation sectors, a significant drop from about 1700 in 2004. At the same time as fund numbers have reduced, asset levels have ballooned, with the average fund growing to $2.6 billion from $300 million in 2004.
According to CoreData, some commentators believe the “sweet spot” for funds is around A$10 billion to $15 billion in assets under management. However, many argue that it’s not size, but efficiency, that will set apart the successful funds from the rest of the pack.
Clearly Australian funds are far from the point where diseconomies of scale might kick in, says Kevin Liu, a lecturer in actuarial studies at the Australian School of Business. While fund size, investment choice and expenses play a pivotal role in the net return for superannuation fund members, so does the profit orientation of the funds, according to Liu.
A key difference between industry funds and retail funds is that the former are not-for-profit, hence they are able to pass on to members the benefits that come with size, such as reduced fixed costs and more favourable outsourcing arrangements. Growing retail funds may also be able to reduce the same operational costs and investment expenses, but because they are required to distribute return on capital to shareholders, they are more likely to retain the benefits than pass them on to members, Liu says.
Alex Dunnin, director of research at financial services provider Rainmaker Information, has a similar view.
