Consolidation, rationalisation and regulation, but also innovation, transformation, internalisation and cooperation are some of the ‘ations that will be defining the Australian investment management space in 2020, the 6th Fund Summit has heard.
Speaking at the Summit, Helen Rowell, Deputy Chair at the Australian Prudential Regulation Authority (APRA), Debby Blakey, Chief Executive Officer at HESTA and Brett Himbury, Chief Executive at IFM Investors, said that at the core of it all is a demonstrably greater focus on member’s interest.
“Certainly, what APRA will be driving is very much a focus on member outcome delivery. Our view would be that, if a superannuation trustee doesn’t have a very clear and distinct value proposition that they can execute and deliver efficiently to their members, then they seriously need to ask why they are in the business,” Rowell said.
Of all ‘ations, it is consolidation that has been attracting the greatest headlines of late.
Rowell said that while she expects the pressure and push for fund mergers to continue, consolidation alone is not the answer. Instead, she said, a diversity of fund structures and operating arrangements would benefit competition.
“I actually think it would be a pity if we ended up with an industry that was dominated by a handful of very big players. I think there is more innovation and competition and better outcomes for members going to be delivered via quite diverse set of players, from small to large, operating in different ways and providing different value, purpose and outcomes for members,” Rowell said.
Blakey agreed that bigger is not necessarily better, pointing out that for every successfully merged business there are just as many businesses that fail to capture the benefits of scale. “The getting to the point of merge is actually a small part of it. It is what you do with the merge, it is how you transform it, how you find those economies of scale, the synergies and how you take the business from there [that creates value],” she said.
Internalisation is one option that is available to superfunds with significant scale and here, panel feedback was overwhelmingly positive. While HESTA’s aspirations in this space are “quite modest”, Blakey said the internalisation process has provided the fund with greater insights into the challenges and opportunities in the fund management space.
“I think superfunds internalising asset management is a fantastic thing because it is going to bring our industries closer together,” Blakey said, a point that was echoed by Himbury.
“As a fund manager, you have got to come back to what asset owners are trying to achieve. They are trying to get their fees down and their returns up, they are trying to get greater involvement in the investment decision making process, they are trying to get greater governance rights over assets – unlisted assets in particular – so if they are the things that they are trying to solve and internalisation is the answer then how can we help them solve that in another way?” he said.
“I see it as an opportunity to be frank. There will only be a small number of funds that will insource a small number of their funds, and the rest of the industry will grow from $3 trillion to $6 trillion. A big part of it will be outsourced, so how can we work differently and better with a group of people that have a different capability, a different skillset, a different knowledge, a different orientation,” Himbury said.
In the spirit of member interest, rationalisation is another key theme that will affect fund managers, products and superannuation options on offer. “We have got a huge amount of complexity in the system that is adding costs and it is questionable whether it is adding value. I think, again, the obligation is on the providers of those products and options to really think hard about whether they are all needed and what rationalisation is needed,” Rowell said.
Himbury said an increasingly empowered investor base with a lower tolerance for suboptimal results will also drive a rationalisation of the asset management landscape. He said that fund managers that failed to deliver returns would struggle and ultimately be forced to quit. “In the funds management context, I don’t know about consolidation, but there will certainly be rationalisation. There are too many of us,” he said.
“In the environment that I foresee in the future, if you don’t [live up to your promises] then, with less funds being more demanding, there will be less fund managers absolutely. That will probably be disappointing, because some might leave that we would like to stay, but I think there will also be a lot that leave that frankly haven’t met the expectations,” Himbury said.
Himbury said that from a scale perspective, superannuation members have not particularly benefitted from the significant growth in assets under management experienced by the superannuation industry in recent decades.
“When I started in this industry, it was $40 million and [fees] were about 80 to 90 basis points (bps). Today it is $2.7 trillion and [average fees are] 70-75 bps […] So where have the scale benefits gone? Well, to us, agents to be honest. Whether we are fund managers, asset consultants, administrators, whatever else. So we have got to have a fundamental rethink as to how we get the fees down and the returns up,” Himbury said.
In this environment, it is innovation that is likely to be the most significant ‘ation of all.
“In an industry where we have the luxury of the government legislating [a mandated 9 ½ per cent] growth for our sector, it is not renowned for its innovation,” Himbury said.
That innovation, Himbury said, can only truly come through cooperation and leveraging different skillsets and insights throughout all aspects of the investment chain. “What I would like to think about is how the skill and the knowledge and the capability and the member connectivity that exists in asset owners can collaborate and innovate through the skillset that exists in asset managers. Let’s get the owners and their managers together and collaborate and out of that I reckon we might surprise ourselves as to what innovation might look like,” Himbury said.
Rowell said that APRA would support more innovation, though she recognised that regulating innovation also has its challenges.
“There hasn’t been enough innovation and we would like to see more innovation, not less in the super space,” she said. “We have seen some good ideas where investment managers overseas for example have really good ways of managing the post retirement phase. They can bring that to our market and partner with superfunds to do that, but we haven’t necessarily seen that embraced in the way we would like,” she said.
However, innovating in a rapidly changing regulatory environment comes with its own set of challenges, as HESTA found when it decided to introduce different investment options across retirement and accumulation portfolios, only to find that subsequent legislative changes brought great complexity to this suite of options.
“Because retirement is so different to accumulation, given there is no tax on investment earnings, HESTA made a decision to offer a completely different set of retirement products to those we have for accumulation. [The legislative changes with respect to tax on Transition to Retirement Income Streams] spoilt our design if I can be that blunt and we are now having to revisit it,” Blakey said.
“I think this is a real danger when people do innovate and think creatively, when there is a change of regulation it can create real issues,” Blakey said.
Looking ahead, next year’s environment will be a case of “more of the same, but even more challenging” but there are also significant opportunities for those organisations that look to make a difference. With new technologies providing solutions and efficiencies that, previously, organisations could only dream of, an increasingly talented and capable workforce and a greater focus on member outcomes across the board, the opportunities for innovation in the Australian financial services landscape are also greater than ever.