"There was a steady stream of mergers before 2021 and the introduction of the Your Future, Your Super performance test fast-tracked that merger activity, with a number of funds forced to merge after they failed the test," Mano Mohankumar, senior investment research manager at superannuation research and analytics provider Chant West, said in emailed comments.
He believes there will be more mergers in the coming years, but it will likely be at a slower pace than it has been over the past two to three years.
In 2021, the Australian government rolled out new regulations on superannuation performance called the Your Future, Your Super review, which made super funds' default products subject to an annual performance test and created a comparison tool for the general public to weigh their super options, among other things.
"Now that (the) performance test in its current form has been in place for three years, we expect very few other funds will fail the test as those that are close to failing are managing their investments to ensure they don't fail the test," said Mohankumar, who is based in Sydney.
Funds have merged to tap economies of scale and moved to internalize more of their investments in a bid to improve cost efficiencies and performance.
An estimated A$700 billion ($469.1 billion) to A$1 trillion of the A$3.5 trillion industry is managed internally, according to a September report by Frontier Advisors, which provides advice on over A$630 billion of assets across superannuation funds, charities, universities, insurers and the public sector.
That amount has nearly doubled from five years ago, when the amount of internally managed funds was estimated at slightly less than A$400 billion, according to the report.
However, while internally managed funds can result in good outcomes, there is little independent review or direct public scrutiny of their performance compared to external managers, the report noted.
In addition, funds tend to conduct a straightforward cost analysis when internalizing their investments, but the Prudential Practice Guide issued by the Australian Prudential Regulation Authority recommends that return equivalence or enhancement should instead be given higher priority, the report wrote.
Rich Nuzum, New York-based executive director, investments, and global chief investment strategist at Mercer, agreed.
"There continues to be a focus on cost and expense ratios, which is good on one level, but I think it massively overshot in Australia to where the focus was on headline expense ratio, not return to fees and not the content of the portfolio," he said.
This focus is particularly prevalent in the private markets space, where he has observed large asset owners bringing their private equity, infrastructure, real estate and private credit investments in-house, which saves money on fees, but "puts them at risk of being the dumb money at the poker table," he said.
"The idea in the private markets is if you don't have an information edge, you're literally providing liquidity to people with inside information. So it's really a bad space not to be highly skilled and highly competent," he said.
Having indirect ownership of companies will allow institutional investors to add value to the companies, which is far more difficult than investors give general partners credit for, said Michael Aked, the Melbourne-based senior investment strategist at Scientific Beta, an index provider specializing in smart beta strategies.
About $49 billion of assets tracked Scientific Beta indexes as of July 31.
In addition, the skill sets of the in-house teams that superannuation funds hire is unclear. There are a limited number of asset managers that have appropriately trained and experienced portfolio managers, and the ability of superannuation funds to properly compensate these individuals is an open question, he said.
"If they are implementing a simple factor-type portfolio, that would be great. You can do that at size with very small teams," Aked said. "But you will need to have contact with thought leaders to make sure your investment strategies are continually updated and actually invested in a way that is aligned with the newest ideas. To do that you need to have partnerships that are more give than take, or than just extracting (intellectual property) capital," he said.
Investing alongside a factor or smart beta manager could be beneficial since many professionals in the space are continually researching and working with professors from universities, he added.
"Factor investing is unique as it has the academic rigor of the asset pricing literature. As new asset pricing ideas are fomented in academic circles, having the knowledge and machinery to convert these ideas into portfolios require true partnerships where all parties are adequately rewarded," he explained.
He also added that the mergers in the superannuation industry have not brought down participant fees sufficiently.
"The Productivity Commission report is pretty clear that fees of the smaller funds are too high, but the average fee we are still paying over 80 basis points, which is much higher than it should be."
Chant West's Mohankumar cast a less pessimistic view, however. "Super funds are thinking about where they need to be in a few years' time. They recognize that increased scale is an important enabler for many of their objectives," he said.
The increased scale provides greater access to assets in private markets, better access to quality staff, and allows the super to better engage with participants to grow their assets, to name a few benefits, he said.