26 September 2023

Small is beautiful: Fund size is no indicator of performance

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John Durie* says the old adage ‘bigger is better’ doesn’t hold true when it comes to superannuation funds.

Outgoing APRA chair Wayne Byres has a penchant for bigger superannuation funds but the reality is when performance is measured, big is not necessarily better.

In fact, being small often helps.

It should be noted Byres was talking about administration and not just performance.

Frontier’s David Carruthers told Investment Magazine “funds are required to undertake an annual member outcomes assessment of whether its members are disadvantaged by virtue of the fund’s scale.”

“Similar to last year, size of fund was not a significant predictor of return.

“Only three of the top 10 performers had assets greater than $30 billion, while five had less than $15 billion.

“While the poorest performing funds all had less than $5 billion, many other funds of similar size produced very good performance,” he added.

JANA Investment Adviser executive director John Coombe spoke for many when he told the Investment Magazine ‘the jury is still out’ on the issue”.

Long-term horizon

But one year is not a meaningful superannuation term said Carruthers.

“Looking at this metric over a 10-year period shows a stronger correlation between size and performance.

“Funds greater than $10 billion have had better performance on average,” he said.

The question is he said if “funds with better performance attract more new members, it is unclear whether the larger funds have better performance because they are large, or whether they are large because they have better performance”.

Super Ratings’ rankings for the 2022 financial year show over 12 months, seven out of the top 10 funds fell below the $30 billion threshold which is considered the benchmark for sufficient scale in the industry.

SuperRatings’ executive director Kirby Rappell said “the onus is on the big funds to show they are better”.

Some of whom APRA had ranked their My Super products as failures last year including Australian Catholic Super, Christian Super and Energy Super are in the process of merging to create bigger funds.

Behemoth Unisuper has acquired Australian Catholic Super with combined $110 billion in management, Energy Super has teamed up with LGIAsuper with over $20 billion in management and Christian Super will merge with Australian Ethical later this year with combined funds of $9 billion.

APRA member Margaret Cole said in a recent speech of the 145 funds in the industry, some 105 manage just nine per cent of the assets.

“The optimal size of the industry remains a fair distance from where we are now,” she added.

“Telstra Super is a medium-sized fund with just under $25 billion under management and its chief investment officer Graeme Miller is a big proponent of smaller funds telling Investment Magazine, “at some point scale can begin to hurt rather than help.

“Complexity and bureaucracy can cause friction in the investment process”.

Limits to size

Outside the top 50 stocks on the Australian stock exchange, which are the most liquid, there is a definite capacity limit for the big funds which cannot easily trade in and out of stocks without affecting the price of the stocks.

Equally if a big fund was to make a big bet on a small company, its size would limit its impact on overall performance.

This explains why the big funds are increasingly buying the whole company if they like it.

In funds management, TelstraSuper’s Miller looks at past heroes like AMP, which for much of its life “has been the most respective and dominant fund manager but we have all witnessed the massive destruction in value”.

“It is more difficult and complex to be nimble and decisive when you are bigger and culture and governance is also harder,” he said.

Miller runs a hybrid investment model with one quarter of the assets managed internally and the rest externally.

Australian equities, fixed interest, cash and real estate tends to be managed in house just as with AustralianSuper.

Qantas Super’s balanced option came in second achieving a return of 0.6 per cent, following its first-place result for the financial year to 30 June 2021.

Over 10 years, its performance is a credible 8.1 per cent.

Its chief investment officer Andrew Spence commented, “our focus on diversification, risk management and investment governance help to deliver competitive returns despite the uncertainty in markets, as evidenced by our returns in the 2022 financial year and 2021 financial year.”

CARE Super with $20 billion under management is another strong performer both short and long term under Suzanne Branton’s investment management.

She too adopts some of the same tactics of the big guys with co-investments with external managers like private equity.

Her 20-person investment team runs which she calls an active low risk investment approach.

APRA’s Byers in a speech last month put forward the opposite case noting the top 17 funds by size which manage over $50 billion in assets control 70 per cent of the industry’s assets.

The biggest, AustralianSuper with 1,200 staff and roughly 220 people in its investment management team, has $260 billion in assets under management.

There is a rule of thumb which says $1 billion under management requires one per cent to manage so if you have $25 billion under management you need 25 people to manage.

Byers noted “size translates into economies of scale which help deliver better outcomes”.

“Reduced expenses improves operating efficiency,” he added.

*John Durie is a contributor at investment magazine.

This article first appeared at investmentmagazine.com.au

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