Systemic risk in the superannuation system likely doesn’t stem from funds themselves, but from their service provider relationships. Regulators need to be thinking harder about where and how it arises – something they’re not necessarily well set up to do.
Big asset owners and managers are embracing the private markets as one avenue for growth, but the complexity that brings to portfolios means they also need to get a better view of what might be decades of siloed information.
More pros and cons for super-sized funds
The trend towards super consolidation has so far produced two megafunds – AustralianSuper and Australian Retirement Trust, each with around $250 billion – and a handful of very large funds with FUM at or above $100 billion. With APRA cracking the whip at smaller funds to merge and get above a certain level of FUM considered ‘sustainable’, there’s going to be more.
“In terms of economics, you need a certain scale to justify what you’re doing,” David R. Gallagher, professor of finance at Bond University, said in a June lecture. “APRA is trying to seek merger activity. So does consolidation make sense? It can – but if you get really, really big you’ve got other problems too.”
The advantages of size are now well established: if funds get bigger they can bring down costs for members, negotiate better deals with external managers and gobble up chunky infrastructure assets without much trouble. The disadvantages include the increased bureaucracy and complexity associated with increased size and the fact that size makes funds stick out.
“The larger you are the harder it is to beat everybody else,” Gallagher said. “So if you’re 20 per cent of a market and you’re trying to trade a significant parcel of stocks everybody is going to see you coming and you’re going to have substantial price impact in how you trade that allotment. Being large has disadvantages in that people can see that you need to move assets and that can effect the prices at which you can trade.”
The investment universe also contracts, because if you’re big you need to buy big.
“Because we have takeover laws, if you become a substantial shareholder you have to notify the market and the regulator,” Gallagher said. “You’re not allowed to go over 19.9 per cent of a stock – then you become not just a substantial shareholder but have to make a formal takeover bid for the company.”
“Funds don’t necessarily want to take over the running of companies; they want to invest in companies but they don’t want to run them. By their sheer size – by being large – they have more difficulty in identifying investment opportunities because they want a bigger slice of it. And so what we’ve seen is that large super funds have had to invest outside of listed markets.”
Gallagher noted recent research from Geoff Warren and Scott Lawrence, specifically a table showing how much of several ASX-listed companies a fund targeting a 25 per cent weight to Australian equities and a minimum holding equal to two per cent of the equities portfolio would need to hold to meet its needs. To hold a two per cent position in Pro Medicus (at the time of the research the 75th largest company on the ASX) a $100 billion fund needs to take 7.4 per cent of the company while a $250 billion fund needs to take 18.4 per cent.
“As you get large your impact on a market and the amount you own of a stock is getting larger as well,” Gallagher said. “And so the size constraints mean you need to go elsewhere because you’ll soon become a dominant major shareholder in more and more listed companies.”
