Glamorous ad campaigns and glitzy sponsorships were once the domain of the retail super funds, the big-fee, bank-owned money managers. On the other side of the tracks, their modest rivals from the industry super sector eschewed the limelight.
They plugged away for members, their costs were lower and their returns, year after year, were therefore superior to their showy retail counterparts.
They still are. Though things are changing. Those who tuned in to the Australian Open tennis over the summer could hardly have missed the deluge of advertising by AustralianSuper, now the country’s biggest superannuation fund with a gargantuan $95 billion in assets under management. Its umbrella group, Industry Super, even rolled out tennis star Lleyton Hewitt as an ambassador for its retirement campaign.
There is an unwitting irony in this Lleyton sponsorship. Unlike the typical Industry Super battler, Lleyton Hewitt is based in the Bahamas. Whether he is receiving the 9.5 per cent super guarantee on his endorsement deal with Industry Super is therefore unclear.
In any case, AustralianSuper over the years has represented its members well. It has also gone on an unprecedented acquisition binge however, and the question needs to be asked; how is this serving the interests of members? Is it vanity? Is it a costly and unnecessary exercise in empire-building?
Unlike retail funds, imbued with an explicit profit motive, the primary duty of industry super is to represent the interests of members. The AusSuper narrative is essentially, then, if we grow we can deliver economies of scale to our membership. Ergo, costs will come down per member.
Indeed chief executive Ian Silk talked a lot about scale in a series of “exclusive” newspaper articles over the weekend. Some $2 billion has been spent in recent times buying property in London and Hawaii.
The scale narrative does not stack up, at least yet, when you look at the costs line in the annual reports. Last year, costs increased 9.4 per cent last year to $292 million (from $267 million prior). That is about $140 per member for each of its 2 million members. Staff costs alone increased 35 per cent from $51 million to $69 million in one year.
The higher costs were covered by increasing fee revenues, which jumped from $233 million to $288 million. The Member Direct Option, for instance, doubled its fees. Rather than using its growing scale to reduce fees and benefit members, AustralianSuper has been deploying its rising fee revenue to become even bigger and more powerful.
This is not a one-off. Expenses have been rising steadily every year since 2010. They have more than doubled. The business mix has changed so direct comparisons are fraught but total expenses rose from $280 million in 2010 to $833 million in 2014 while expenses of the trustee operation went up from $139 million in 2011 to $292 million in 2015.
It is fair to say that, for an institution of this size, one which now rakes in $13 billion annually in super contributions, a lazy $300 million in costs is hardly material. So what if they splash a bit on the tennis and The Voice?
“With more than 2.1 million members, advertising is one of the most cost effective ways to communicate,” said a spokesperson in response to questions.
There is something to this, and it could also be argued that the interests of members may be advanced by an institution which is very large, very well-known and therefore politically powerful. It could equally be argued though that scale has not delivered cost benefits to members – yet – and AustralianSuper appears to be an exercise in empire-building and, as such, is in danger of enfeebling its future returns. Corporate cultures of rapid growth and acquisition often end in pain.
Despite all the evidence which suggests passive funds perform just as well or better than active funds (thanks to lower costs), AustralianSuper has been warning against passive products and has actually been increasing its active management. The hirings will continue this year so costs are likely to go up again.
This may be the biggest but it is merely one fund. Most industry funds are more demure when it comes to splashing their members’ money about. The danger for the sector is if others enlist in a marketing war to defend their turf from expansionist managers and the entire sector ramps up its costs.
One thing is certain. Against the present backdrop of market volatility, you can bet your bottom dollar that, while investment returns are falling across the $2 trillion sector, investment fees will prevail; rail hail or shine.
As Lleyton would say: “Come On!!!”