Australian super funds cut managers for sharper focus

Australia’s $4.8 trillion superannuation sector is getting bigger. Those tasked with steering the super juggernaut towards even greater scale must balance a more complex investment environment, a range of objectives, from meeting diverse member needs and fulfilling fiduciary obligations to making increasingly technical investment allocation decisions.

The balancing act facing fund trustees and their advisers is not a ‘one size fits all’ challenge across the sector. Each fund and member cohort is unique, regardless of scale, and is thus challenged by its own distinctive operational and strategic internal ‘tightropes’.

One such balancing act is the decision to outsource or insource asset management capability. 20 years ago, such decisions were an uncommon feature of the standard trustee board discussion.

Funds’ approach to external managers has also evolved. Two decades ago, an Australian equities portfolio might have allocated capital across seven or eight managers, typically blending value and growth styles in the pursuit of diversification. Over the past 15 years, however, funds have increasingly consolidated these mandates, deploying capital to a smaller number of managers, whether through active or passive strategies.

Investors have long adopted Harry Markowitz’s insight that diversification is the only free lunch in investing. Yet modern portfolio construction also recognises that over-diversification can become a drag on performance. Once a portfolio reaches an appropriate level of diversification, adding more investments may potentially increase cost and complexity and contributing limited additional alpha.

Funds are now bringing those historic lessons and strategic asset allocation learnings to private markets, where there is no index to fall back on. Rather than add managers simply to diversify the roster, they are asking what each relationship contributes and whether going deeper with the right partners would deliver more. Such subtle choices in today’s marketplace are informed by experience, not some unavoidable consequence of scale.

Selectivity starts with beliefs, competitive advantages and philosophy.

Internalisation or in-sourcing asset management capability is a well-established shift in Australian superannuation, but funds are not all moving towards the same operating model.

A fund’s decision to build investment capability in-house is more likely to hinge on its investment beliefs, competitive advantages and overarching investment philosophy. Some of Australia’s largest funds continue to rely heavily on external managers, while some smaller funds have built internal teams. A fund that does not believe internal management will deliver better results for its members, or whose competitive advantage lies in a young member base and a very long investment horizon, can reasonably reach a different answer from