Large super funds risk becoming big ships that are too hard to turn, according to Mercer Investment
Consulting business leader Simon Eagleton.Eagleton said large superannuation funds might face the same capacity constraints as large fund managers in terms of investment performance. This issue was particularly relevant as Australian superannuation assets were now approaching $1 trillion, consistent with the size of the Australian economy.
This means funds face a home country bias in terms of their asset allocation. “We see that even medium-sized funds cannot get their desired exposure in asset allocation in Australia”, Eagleton told a recent Fund Executive Association Limited (FEAL) seminar. “Funds should look to offshore investments in order to overcome the challenges of scale”, he said.
He also said the compulsory superannuation environment and the growing merger between super funds would lead to further capacity management issues. Larger funds could outperform smaller funds because they had more bargaining power and fixed costs could be distributed more widely, he said. He believed, however, there might be a turning point where bigger funds began to experience diseconomies of scale.
Factors that could frustrate a fund’s ability to perform include bureaucracy and the increasing reliance on specialised jobs within the fund, which could lead to lack of staff commitment to organisational goals. Eagleton also said chief executives might find it harder to make good decisions because the information they received had to filter through more management layers. He suggested funds should focus more on achieving operational efficiencies and an alignment of interests between internal staff and external provider.
