Greater internalisation of investment activities within superannuation funds of size will be one result of the present culture of consolidation, according to Brett Westbrook, departing chief executive of Futureplus and chair of the Funds Executive Association Limited (FEAL).
Speaking after the FEAL conference, Westbrook commented on the challenges posed by a superannuation environment characterised by member choice and other recently introduced changes.
“We have seen more changes in the last three years than in the 20 years before that,” he said.
“In a competitive environment, in a consolidation environment, not everyone will win; I don’t think the consolidation is over yet”.
According to Westbrook, the broadest challenge for those funds that do survive is to “confront the transition from running a superannuation fund to running a broader financial services operation”.
He believes that funds can no longer concentrate solely on compliance and governance, but need to bring a range of other skill-sets to the table in order to remain competitive.
While acknowledging the challenges presented by the current environment, Westbrook also feels it presents plenty of opportunities. Already we have seen the rise of mega-funds such as Australian Super, formed by the merger of the Australian Retirement Fund and Superannuation Trust of Australia.
“When you’re a fund of $20 billion in size and bigger, there are a lot of things that you can contemplate doing yourself,” Westbrook said, referring specifically to investment management, marketing and call centre operations.
While he feels the economies of scale required to administer funds will keep these activities outsourced for most, Westbrook thinks that over time some will consider performing functions traditionally undertaken by asset consultants.
“At the moment it’s very unlikely that a fund would be of a size where it would start setting up its own private equity or infrastructure operation,” Westbrook said, but highlighted the operations of some overseas funds such as Canada’s Ontario Teachers’ Fund. “They don’t invest through managers but do it directly, and I see this happening in Australia going forward.
“We’ve seen that trend, and are now getting to the stage where some funds are doing their own strategic asset allocation and risk management,” he said, citing REST’s decision to run its own fixed income portfolio.
Taking this one step further, Westbrook said: “There undoubtedly will be investment strategies [that funds] internally manage or take a more hands-on approach with.”
