AustralianSuper - Is Bigger necessarily Better?
AustralianSuper is Australia's largest superannuation fund, with over $300 billion in assets under management (AUM) and 3.1 million members.
Full disclosure, the author has had superannuation invested with Australian superannuation for over a decade, and very much enjoyed that period when the fund almost invariably ranked in the top three funds for return on investments. However, investment returns over the last few years have been less impressive, and AustralianSuper's marketing material now appears to stress the fund's "long term" rather than "short term" returns.
Some volatility in returns is to be expected, but this article focuses on whether "bigger is necessarily better" when it comes to selecting a superannuation fund, using AustralianSuper as the exemplar. Let's look at the question from the following perspectives.
Investment Performance
In very general terms, a larger fund probably has the following advantages 1) the ability to reduce the unit cost of managing the funds since you are spreading your fixed costs over a larger base, although experience suggests that remuneration tends to increase with assets under management, regardless of performance; 2) the ability to better resource your investment department - although this would be marginal beyond a certain point, and 3) access to investments which were not readily accessible to "smaller" funds.
It is the third element that tends to be highlighted in public, and particularly the ability to invest in private markets including private/direct property and infrastructure with longer timeframes.
But where the "rubber hits the road" is investment performance, and it's very hard to argue looking at the figures below that AustralianSuper's overall investment performance has improved in the last 1 to 3 years with increasing size - although to a degree this is unfair because the fund is being measured against very high quality results over the preceding decade. In the chart below you will see that over the last year AustralianSuper has only exceeded the one year benchmark return in 2 of the 11 asset classes. This includes a stunning under-performance of the benchmark by 25% in the Stable category (3.83% return vs 5.02% Benchmark).
So, there is no obvious evidence in recent investment results that the significant growth in AUM over the last three years has provided a competitive edge in terms of results. Indeed, some of the poor results can be associated with significant write-downs of direct property assets and while some of the factors triggering the write-downs could not necessarily have been foreseen, the issue is whether the ability to hold large directs assets means that the fund becomes less diversified. There is also the important issue, subject to much discussion, around whether privately held assets offer too little transparency when it comes to valuation.
Service Levels
Size absolutely provides an advantage when it comes to implementing the best and most appropriate service systems - and, when you are dealing with 3.1 million members, quality people operating quality systems is a must. Again, however, AustralianSuper was "large fund" before it became a "mega fund" and in principle existing systems should simply have scaled up to meet higher volumes - providing a cost rather than necessarily a quality advantage. In terms of fees alone, AustralianSuper is certainly competitive, just edging into the "Top 10" list of Low Fee providers as ranked by SuperRatings.
Unfortunately, perhaps the only objective barometer we have at the moment of to assess the quality of service provided by AustralianSuper is the number of complaints made to the Australian Financial Complaints Authority (AFCA) - and these do not portray AustralianSuper in a positive light as you can see in the table below. It is appears to be the most complained about superannuation fund both in total and, more importantly given its size, in complaints per member.
The crucial question that applies to many superannuation funds as more more members move into the retirement phase, is whether organisations that have been largely focused on investments are well-placed to move into an environment where an increasingly large part of the organisation is focused on higher volume service transactions.
Product Development
Continuing the thread above, bigger funds should mean bigger resources, and that should extend to product development. In this context, what we mean by product development is offering a lifetime income stream - such as we have seen from QSuper, ART and UniSuper - all smaller funds. All that has been seen so far is media comment to the effect that AustralianSuper will launch a market linked retirement product in "two or three years" - how the leading Australian superannuation fund, at least in terms of retired members, finds that acceptable is difficult to comprehend.
What has become apparent is a lot more marketing around AustralianSuper's Choice Income product for retirees - that does no harm, but it is not a substitute for substantial product development or doing more to meet its commitment to developing a "Retirement Income Strategy". Communicating more with members in or approaching retirement, in terms of seminars and access to advice is again a good thing, but two hour seminars prior to retirement are fundamentally inadequate except as a means of channeling some individuals into advice.
As we have argued previously, both AustralianSuper and the industry more widely, need to invest heavily in member education for their own benefit and this should be approached on a cooperative basis and extend throughout the member's life. Funds should certainly compete in relation to investment performance and service, but not in terms of education where there needs to be a shared view on syllabus and delivery - something which does not exist at the present time.
In Summary
For much of its existence AustralianSuper's major problem has been to manage significant growth year on year but there appears to be no clear evidence at all to suggest that AustralianSuper has (yet) leveraged its substantial increase in size over recent years to provide significant additional benefit to members. It is possible that substantial size will bring investment benefits which are yet to be realised, but there are also potential disbenefits, such as less management flexibility and distance from membership - perhaps the "ideal" super fund is large in size, but not "mega".
Hence, while on most metrics AustralianSuper is a high quality super fund prospective members should not assume that "big necessarily means better". Indeed there are some early indicators that suggest that a relative lack of performance is impacting rollovers into the fund; and while the size of the fund provides it with some advantages these will not allow it to prosper through a prolonged period of investment underperformance. Nor will marketing triumph over substantive service and product improvements.
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