Large superannuation funds are not necessarily better performers than smaller ones, asset consultant Towers Watson has said.
In response to the report from the Australian Prudential Regulation Authority (APRA), Towers Watson’s head of investment strategy Tim Unger said smaller not-for-profit/industry funds could also have very good governance structures which were as crucial as size in delivering good risk-adjusted returns to members.
The APRA report said larger not-for-profit funds (industry, corporate, public sector) performed better and had lower costs than large retail funds.
“The sweet spot for funds is in the $5 billion to $20 billion band,” Unger said.
“Less than that and they’re a bit small. More than that, they can become unwieldy.”
He said that as funds grew “they have more to spend on internal resources, which ultimately should lead to good governance – this applies to both retail and not-for -profit funds.
“On the other hand, as funds get larger, there has to be active management to get good, risk-adjusted returns – you may end up having four or five equities’ managers and end up swamping the market.”
The downside of the governance issue was that funds thought they had governance, but actually they did not, he said.
“The elephant in the room is that good governance can improve returns and a lot of funds think they have good governance – but they don’t. It’s like driving – everyone thinks they’re good drivers, but they’re not,” he said.
“Likewise, funds think they have good governance, but they don’t.”
Unger is one of the authors of the Towers Watson study, Best Practice Investment Governance, which studied 10 funds worldwide that had built excellent reputations for governance and delivered strong returns to members.
One industry fund from Australia was in that elite group. No Australian retail/for profit funds were in the 10 studied.
In relation to the APRA study, Unger said that in theory the greater scale of larger funds should mean they should be able to negotiate lower fees for the asset classes, “but the difference between large retail funds and large NFP [not for profit] funds is two things”.
“First, the retail funds are trying to generate profits for shareholders and they may not necessarily pass on those savings. There may be competing interests.
“Second, the large retail funds may be offering daily liquidity so they face the same constraints as some smaller funds.
“These two factors don’t stop the large retail funds but they are headwinds for retail funds, whereas large NFPs have enough to spend on internal teams and are not so big that they swamp the market.”
