With fewer and larger funds the new reality, LEWIS MORELINE explores the pivotal role of data in delivering better returns, member experience and more informed investment decisions.
The rise of mega superannuation funds in Australia is being driven by unprecedented merger activity, rising fund inflows, and strong investment markets. It is estimated that more than three-quarters of all pension assets are managed by just 12 superannuation funds.
Scale represents a fine balancing act for superannuation funds. There are clear benefits of scale, but these are often offset by growing complexity.
Data is a critical component providing insights that allow complexities to be managed as the fund scales. Often there is so much data to amass, and ways to use it, that there are multiple valid approaches for funds to take.
In terms of the best way to utilise data, we have seen the most successful funds identify a specific problem, then take an iterative implementation approach to bring forward as much value, as early as possible. One of the first places to start is the investment portfolio.
A fund’s portfolio can comprise thousands of listed and unlisted assets. While some data can be easy to collate, such as information from ASX listed companies, others are not so simple.
Data attached to unlisted investments such as private equity and infrastructure, is typically available on a lag compared to listed equities. As unlisted assets now comprise a substantial proportion of a typical fund’s asset mix, there could be an information gap, particularly when markets are volatile.
Funds are also managing exposures through more complex asset types and structures, such as derivatives or foreign exchange overlays. As Australia’s largest custodian, we work with funds to ensure they have this data as fast as possible, and often combine it with other external data such as environmental, social and governance (ESG) analytics. Having more comprehensive data at hand can help our clients make the most informed portfolio decisions, particularly at a whole of fund level.
Often this leads to a better understanding of risk and return, and ultimately better decision-making to improve returns. It can encompass managing risk and volatility or tilting the portfolio to maintain a strategic asset allocation.
Size brings scale and a host of potential benefits. Many of the operational costs of running a business tend to be fixed, which provide a competitive advantage as organisations grow larger.
Bigger organisations tend to have more resources to invest in technology and data, creating a platform for greater efficiency and insights.
In the case of superannuation funds, scale also allows them to lower external investment management expenses and return those savings to members. Funds running in-house equities teams may have tighter control of their investment strategy which, for example, could influence a more pro-active responsible investment portfolio.
Other funds are going further by co-investing directly in unlisted assets alongside their fund managers, which also lowers fees.
However, with scale, organisations will encounter different challenges that will also need to be addressed.
Running a large business involves scaling and hiring more people, sometimes rapidly, which can make it harder to retain the culture and agility that built the organisation’s success. Further, as funds merge, meeting the needs of a more diverse member base—particularly as they approach retirement—becomes increasingly difficult. Funds will need to rely on their external partners for support as they look to continue delivering highly specialised services.
Smaller funds on the other hand are likely to find it easier to maintain their tailored approach to member engagement.
Increasingly, big data is also being used to create a more tailored experience for investors.
Many funds are adding to the information they already hold such as age, account balances, and contribution levels to understand their investors. This data is already shaping investment portfolios and insurance offerings. For example, one fund that caters to predominately young female workers, uses information to add more downside protection to their investments should they need to take periods away from the workforce.
Another fund, that caters to many self-employed, casual workers and contractors, uses data to provide more tailored insurance arrangements. Ultimately uplifting the members’ experience and investment protection.
Taking data layering to another level, some funds are adding other information, such as census data, to learn more about the characteristics and preferences of their investors.
Access to quality data will benefit all fund types, from large industry funds to more niche segments as they seek to win and retain members in the longer term. In the future we expect to see an even closer alignment between member and investment data as funds ramp up their engagement strategies.
Many investors want to know that their super is being invested responsibly and aligns with their own ESG principles, particularly around climate change.
Funds can use data to deliver a better experience for their members and also identify when investors feel they are not getting what they need from the fund. Data about inflows and behaviour can identify those at risk of switching to another fund. Are members regularly checking the investment performance on the fund’s website? Have they stopped their contributions? These investors could be provided with additional educational material or other information to allay their concerns.
It will be even more crucial to understand these retirement needs as new regulations, such as Your Future, Your Super (YFYS), further increase change within the industry. Investors will now be ‘stapled’ to the fund they already hold (unless they choose otherwise) when starting a new job. How will funds pivot their marketing strategies to attract members when they can no longer rely on the default system?
Organisations need to understand the power and efficiencies of not just scale, but also data, to create a strong foundation for growth