Home / Funds fail to deliver benefits of size as complexity grows

(pictured: Oliver Hesketh) 

With the Productivity Commission review looking at the efficiency of the super system, including the consideration of scale, and with regulator APRA continuing to focus on size as a potential deliverer of greater efficiencies, wouldn’t you think it would be good to look at the actual evidence?

Oliver Hesketh, a partner at research firm Tria Investment Partners, told the ASFA conference that there was little-to-no evidence of benefits from scale flowing through to either member returns or improved services.

In a leading presentation supported by several fund executives, across corporate industry and retail funds, Hesketh said scale had never been seen to be more important than now.

In theory, at least, there were certain things that only a fund with scale could invest in – such as a toll road. Big funds could also squeeze lower prices from suppliers. However, there were other competitive advantages available to funds than size, he said. Better knowledge of members was important, for instance. And in liquid markets investing size tends to be a disadvantage.

Tria looked at three main areas to see whether there was evidence of benefits to scale. These were: for fund managers, in financial advice, and among big super funds.

Hesketh said that cost-to-income ratios for fund managers show “no real correlation” with size. “Bigger managers spend more and more on distribution and marketing and they are capacity constrained,” Hesketh said.

With financial advisers, the assumption was that scale meant that advisors could look after more clients if they had back-office functions to cater for the administration and investment analysis sides of their businesses.

“Once again, the evidence shows that this is not true,” Hesketh said. “Advisors in large groups do not look after more clients. Advice is very time intensive.”

Hesketh drew a distinction between ‘scale’ and ‘size’, whereby scale allowed for increasing returns from a certain function as its assets or number of customers grew, but size not necessarily doing so.

With the big super funds, with more than $1 billion in assets, Tria looked at how much money they had per “product”. The theory here is that complexity is the enemy of scalability, so products with larger customer bases should be more efficient.

Once again, the evidence did not show many funds with products containing large aggregated sums. Retail funds, in particular, tended to have small sums in their products.

Looking at fees, the top handful of super funds, by size, tended to have slightly lower average fees but there was “not much of a relationship” between size and fees.

There were definitely cost savings to be had in administration, Hesketh said, but this re[resented only about one-third of total costs, compared with two-thirds for investments.

Nevertheless, Hesketh said, prices would probably come down over time. He said funds needed to think about three “levers” to help them steal market share from other funds, given that organic growth had slowed, due to demographic and other factors, from 6 per cent to 2 per cent in the past few years.

These levers were: product, price and distribution. It was an important time to invest in retirement, digital and financial advice products, Hesketh said. Price would continue to be something which appeared to be easily comparable – but might not be. And, with distribution, the industry had become more competitive than ever.

“It’s not really a winner-take-all market. You can probably be big and average, but you can’t be small and average,” he said.