Is bigger better for your superannuation?
In the 2021-2022 financial year, six of the 10 best performing super funds had less than $10 billion under management, while seven had less than $30 billion.
How big do you want your superannuation fund to be?
It is a tough question to answer, with a lot depending on what you are after in a super fund.
Big funds tend to have economies of scale which can lead to lower investment and administration fees and the ability to access niche asset classes such as private equity and unlisted infrastructure and property opportunities.
Smaller funds also have their advantages, with the main one being they can be much more agile, jumping in and out of opportunities in smaller companies that tend to be the fastest growing opportunities without pushing share prices around nearly as much as a big fund would do.
Structurally, the mega funds are now getting so big that they will outgrow Australia and be increasingly forced to invest offshore.
Are big funds getting too big to fail?
There are also issues as super funds get really large that they become “too big to fail” – something we Australians are only too familiar with our big banks, which tend to attract rescue packages in times of financial stress.
Who could forget the amazing “support” that arrived for the banks during the Global Financial Crisis, or even during the COVID-19 pandemic.
This issue has been recognised by the Financial Services Minister Stephen Jones who has warned that small funds should not to be forced into mergers and that there is a place for small and medium sized funds.
Discussion paper on mergers
He is now planning to release a discussion paper next year on the issue of mergers and size of super funds, with a very real focus on whether it is in the national interest for a handful of massive super funds to dominate the retirement landscape.
That is certainly a change of tune from the “bigger is better’’ mantra that has been driving fund mergers for many years now.
APRA deputy chair Helen Rowell has been instrumental in that push, at one stage claiming that any fund with less than $30 billion would be in danger of becoming uncompetitive against so-called mega-funds.
However, after years in which the big industry funds have dominated the performance league tables, smaller and for-profit funds have been working hard to reduce their costs and fees and boost their performance.
Did Hostplus really win?
That was shown in the latest 2021-22 financial year figures, despite the fact that they were headed up by one of the biggest players in the $68 billion Hostplus, which produced an impressive 1.6% positive return for its balanced default option.
There has been some controversy over that “win’’ given the presence of unlisted assets in the fund which are notoriously difficult to value properly.
For example, how do you value a “hot” private company like Canva, which HostPlus owns a slab of, with a variety of valuations being used by different shareholders.
Other funds that made the top of the list with positive returns just below Hostplus were much smaller, including First Super, with 45,000 members and $3.8 billion under management, Qantas Super and Christian Super.
Indeed, of the 10 best-performed funds, six had less than $10 billion under management, while seven had less than $30 billion.
Smaller funds did well in a topsy turvy year
The better performance by smaller funds might also have something to do with the sort of tough, topsy turvy year we had in investment markets during 2021-22, which may have rewarded agility over size.
The other thing that is happening in super funds that may stop the trend towards big is better is the game of catch up being played by the for-profit funds that have long been languishing in the wake of the big industry funds.
Those funds that have survived the bruising time since the Banking Royal Commission have been working hard on getting their administration and investment fees down and improving their performance.
Fees are changing
The result of that is that even once notorious names like AMP are being mentioned in dispatches for efforts in reducing fees and it is no longer safe to assume that the big industry funds will have lower fees than their competitors.
Indeed, some of the big industry funds have been raising their fees slightly.
As with all things in investment markets, nothing stays still forever and it is important to keep monitoring the fees and investment performance of your super fund compared with others over longer periods of at least five years to ensure you are still happy with your choice.
Sticking your money in a mega fund and putting it in the bottom drawer is not necessarily a recipe for success.
It may be, but at the very least doing some comparative due diligence every few years should be a given.