AMP’s solution to the problem was to accept that size was indeed a problem when it came to actively managed share funds. It adopted a passive index-style of investment for a large chunk of its Australian equity portfolio. That meant the performance of the bulk of its funds would keep track with the Australian sharemarket.
The rest of its local equity portfolio was split between several small teams as AMP tried to avoid the situation where it was so massive that every decision it made inevitably moved the market.
Increasingly mired
According to some analysts, the giant industry funds, which were the clear winners from the Hayne royal commission, are headed down the same path.
They argue that the largest funds, such as AustralianSuper (which manages $140 billion of members’ assets), UniSuper ($70 billion), REST ($51.6 billion), HESTA ($46.8 billion) and CBUS ($45.6 billion) will find themselves increasingly mired in the AMP trap given the likely surge in their assets under management over the next decade.
To date, the large industry funds have been able to continue to generate strong investment returns by diversifying away from Australian equities into other asset classes, such as foreign equities, infrastructure, debt, credit and private equity.
Typically, the big funds hold about 30 to 35 per cent of their assets in Australian equities, and about 20 to 25 per cent in offshore equities. (The two numbers have been converging over time, as the share held in foreign stocks has steadily risen, while the proportion held in domestic equities has gradually declined.)
But others argue that global capital markets have changed so markedly over the past few decades that even as the pool of assets managed by the industry funds explodes, they’ll still be able to generate strong investment returns.
It’s possible that some industry funds will become so large that, like AMP, they will find it more difficult to trade in and out of particular stocks and are forced to adopt more of an indexed investment style. But this simply mirrors the change in offshore equity markets, which have witnessed an explosion in the size of the passive investment industry.
In the United States market, for instance, index fund managers such as Vanguard and BlackRock are estimated to control just under 20 per cent of total US stockmarket value).
But there’s another reason the industry funds are likely to avoid the AMP trap, and that’s because unlisted investments now comprise a much larger share of the global capital market than they did a couple of decades ago.
The big local industry funds, which receive large and regular inflows of superannuation savings, are well-positioned to invest in these relatively illiquid investments for long periods of time because they’re largely immune from short-term liquidity pressures. Indeed, they’re far more comfortable making these types of investments than traditional fund managers, who have to worry about possible redemptions.
What’s more, large institutions are increasingly trading assets among themselves in private markets. But to participate in these transactions, funds need to have sufficient size to set up in-house research teams to assess the merits of various infrastructure, or tech, or private-equity investment opportunities.
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