Small scale superannuation funds are not destined to disappear and can survive by offering specialist investments while funds that gain scale may see performance drop away as efficiency gains plateau and risk positions are reduced.
In a recently released research paper Brookvine executive director Jack Gray stated the idea that benefits of scale were so substantial and small fund returns were too poor to guarantee their survival was "a prevailing superannuation belief-myth" not supported by research or reality.
Gray stated while scale benefits accrued in process driven areas such as administration and custody there were limits at which point decreasing returns to scale woud push net marginal efficiency gains to zero.
He also stated that scale benefits in investments were mixed with SuperRatings data showing a strong negative correlation between the size and performance of funds over 5 and 7 years while other research showed the opposite with Gray stating this often was the result of better direct internal management of the fund assets.
"Depending on the strategy, diseconomies of scale in active listed equities can occur relatively quickly, probably around $6 billion for a ‘standard' broad-based Australian equities strategy, and perhaps as low as $500 million for some specialised concentrated long-short strategies," Gray said.
"As managers' FUM grow, driven by an all too common identification of size with power and influence and encouraged by asset-based fees, performance tends to fall as a result of greater market impact and of managers protecting their reputation and business by increasing the number of holdings and by decreasing risk."
Gray said smaller super funds can avoid the need for scale and still survive by targeting "investment opportunities left on the table by large funds" in areas of capacity-constrained strategies not available to larger super funds
He said smaller super funds would have a different business exposure and offering than "the mass of look-alike competitors" and could be "re-positioned as the innovative higher growth fund exposed to genuinely different risks, a super fund that's resisting the imperative to become a marketing and distribution machine at the expense of investing".
