The country’s two largest super funds, AustralianSuper and Australian Retirement Trust (ART), now control a quarter of the market regulated by the Australian Prudential Regulatory Authority (APRA), collectively managing more than $620 billion in assets, revealed a Morningstar study.
After a wave of mergers, strong performance and high inflows, the mega fund club has expanded to include Aware Super, UniSuper and Hostplus. At the same time, three additional funds – Cbus, Rest and HESTA – are about to join this elite group.
While this concentration of assets allows these massive funds to benefit from economies of scale, Morningstar warned that this size is a “double-edged sword,” leading to potential challenges in the investment process and governance.
“Active listed equity strategies with greater potential for outperformance often have capacity constraints,” the research firm said, meaning they can only absorb a limited portion of the equity allocation. from a large fund.
For example, of the Australian Securities Exchange’s $2.7 trillion market capitalization, as of March 31, $646 billion, or 24 percent, was held by APRA-regulated superannuation funds – half of which by the eight major member profit funds.
Morningstar analysts explained that when a mega fund tries to actively change its stock holdings, it has difficulty making large-scale trades without influencing stock prices. This limitation can affect both asset allocation and investment style.
“A mega fund may have no choice but to focus on passive, enhanced index, or systematic strategies within certain listed asset classes,” Morningstar said. “It may also be necessary to limit its allocation to these classes, even if its financial market assumptions and asset allocation process suggest otherwise.”
In contrast, smaller funds, while less competitive on fees, enjoy an advantage in terms of agility.
Morningstar noted that some smaller funds, which perform “very well,” can pursue higher-return active strategies without the capacity issues faced by their larger counterparts.
To mitigate these challenges, many large funds are increasingly looking offshore, reducing the traditional “home bias” that has defined the sector. Yet despite this shift, Australia’s largest funds still dominate major local asset classes, particularly Australian shares.
As AustralianSuper targets $1 trillion in assets over the next decade, Morningstar has raised the prospect of a future resembling the banking industry – dominated by a few colossal funds alongside a smaller number of players niche.
However, the company is cautious in its outlook, suggesting that continued consolidation and regulation may not be the “panacea” some might hope for.
“Potential new concerns about large funds are emerging,” it says. “Ultimately, there is unlikely to be a one-size-fits-all solution when it comes to super funds, and it is imperative that members use their best judgment when evaluating a fund in the future. »
