80% to 90% of super investment management outsourced

Superannuation funds tend to outsource upward of 80% to 90% of the management of their listed equity investment – something which puts their role in terms of capital concentration in Australia into context, according to the Association of Superannuation Funds of Australia (ASFA).

The superannuation group has sought to downplay suggestions that superannuation funds could use their combined shareholdings to exert undue influence on Australian publicly-listed companies.

In a submission filed with the House of Representatives Standing Committee on Economics inquiry into the implications of common ownership and capital concentration in Australia, ASFA is arguing that the problem with respect to superannuation funds is over-stated and that legislating to fix any perceived problems would create more problems than it fixes.

“For superannuation funds, asset management functions can be inhouse or outsourced to external asset managers. The relative allocation to either internal or external managers differs across the superannuation universe, but a few stylised facts can be identified,” the submission said. “Firstly, the existence of scale economies in asset management means that smaller funds tend to outsource a larger proportion of assets to external asset managers. Secondly, funds are more likely to outsource management for those asset classes where funds are less able to build niche expertise (to gain an advantage over rivals).”

It said this was particularly applicable to listed Australian equities.

“Even the largest of Australia’s superannuation funds tend to outsource a large proportion of the management of their listed Australian equity investments, and often use multiple external asset managers as a means to incentivise performance among their external managers. While the extent of outsourcing differs among superannuation funds, in general terms, superannuation funds tend to outsource upward of 80 to 90% of the management of their listed equity investments.”

Typically, even the largest of institutional investors own (as distinct from hold) far less than 5% of the equity of listed Australian companies, and most superannuation funds own less than 2%,” ASFA’s submission claimed.

It said this excluded superannuation funds (as the ultimate owners of the equities that are held by funds’ external managers), and other institutional investors that both act as external managers of behalf of other entities (such as superannuation funds) and own equities on their own account.

“The latter group includes large global investment firms that may hold listed Australian equities on behalf of Australian superannuation funds, other types of Australian wholesale and retail investment funds, and investment funds in other jurisdictions,” it said.