Superannuation funds look to tap into the benefits of scale

As the superannuation industry continues to move towards fewer but larger funds, it has become increasingly apparent that the scale derived from such moves can yield significant advantage.

One such advantage is the ability of funds to foster their own in-house investment teams, and according to Kristian Fok, deputy director of consulting for Frontier Investment Consulting, it has already necessitated quite significant changes to asset consultants’ business models.

“To a certain extent, this trend was inevitable and the impact on our business is obvious,” he said.

“There are certain things that we do that are simply more efficiently done in-house; certain investments which may be capacity-constrained with which it’s in the best interests of funds to have their own teams to try and target those,” Fok said.

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“But what that means is that we have to continually think about and evolve our business to remain relevant,” he said.

“In some cases, it means that we’re dealing with internal teams who have far greater specialist knowledge than they’ve had in the past.

“So we have to look at our structure, and we’ve been doing this, to ensure that we are able to research at that level of specialist capability.”

Graeme Miller, head of investment for Towers Watson in Australia, said that he actually welcomed the in-house investment team trend.

“Thus far, it’s been positive for our business and the main reason for that is that increasingly we’re dealing with teams of experienced, talented people who are well resourced,” he said.

“What that means is that their capacity to extract value from a relationship from people such as ourselves has increased substantially.

“And because their capacity to extract value has increased, that’s actually allowed us to form deeper relationships with those clients and it’s allowed us to add more value to their businesses.”

For Miller, the more concerning trend is the one behind in-house investment teams: consolidation.

“I’d say that represents a bit more of a threat to our traditional business model than in-house investment teams in and of themselves,” he said.

“As funds merge, our number of potential clients decreases, and as a consultant you can find yourself in a position where you lose a good client not for any fault of your own but just because they merge.

“Now, we’ve been fortunate that that hasn’t happened in our business, but it is certainly a possibility in the future.”

The reality, according to Fok, is that in a changing industry asset consultants need to remain flexible and dynamic in the services that they offer super funds.

“The bottom line is that we have to think about how we remain relevant to funds more generally,” he said.

“We’re positioning our firm to not just be about investment advice but also to advise superannuation funds on areas that are related to investments, which are probably more product-related.

“So [this includes] things like looking at the question of post-retirement and how you go about offering a relevant product,” Fok continued.

“But there are other ways of diversifying as well.

“For instance, we’re going to be launching a new database system which will give funds access to not only our research, but also done in a way where they can tailor the information that they’re looking for.”

Fok said that Frontier was hoping to have fund managers contribute directly to the database so that clients could highlight the managers involved in their own portfolios.

“They’ll be able to see anything that’s been uploaded or changed that relates to their managers,” he said.

“That will also give them the capacity to monitor particular sectors or managers that they may want to see updates on over time.

“So that’s another initiative that we’re putting in place,” Fok added. “We’re going through deeper testing of it at the moment and we’re expecting to make it available to clients by year’s end.”

Yet the irony for David Stuart, head of Mercer's Dynamic Asset Allocation team, is that while in-house investment teams may be popular within the industry now, there is every chance that external investment will again gain prominence in the future.

“The irony here is that these things tend to go through cycles,” he said.

“I worked for 10 years for a very large in-house fund in the United Kingdom, and through the late ‘80s, there was big phase of moving from in-house to external management.

“The irony was that 10 years later there was some reassessment of whether that was such a good thing,” Stuart continued. “There is a bit of a cycle in some of these things.”

However, despite such observations, Stuart was quick to point out that internal investment management was a logical approach in the current superannuation environment.

“Personally, I think it’s a sensible thing to do,” he said.

“If they’ve got the size and the scale, then I think there’s benefits both in terms of the cost of managing their money but in addition, and I think this is what I was most aware of when I was the CIO of a fund with a large in-house team, you get a lot of investment information from having specialists who are dealing in those markets directly.

“It’s an intangible benefit to funds but a significant positive as well.”

At the end of the day, Fok said that larger, more specialised super fund investment teams were a natural progression.

“However, we still see that there is a need for accessing experienced investors to give different views,” he said.

“And so long as we remain relevant in what we provide, either in terms of the timeliness, coverage or insight, then we think that we can retain a role.

“Certainly, the industry is changing and changing rapidly for asset consultants, but it’s also changing rapidly for the superannuation funds as well.”