Fund managers feeling pressure from super internalisation

1 November 2023
| By Laura Dew |
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A quarter of fund managers surveyed by Frontier have named the move towards internalisation by super funds as the biggest challenge to their business.

In a 10-year review of the firm’s annual fund manager survey, it questioned fund managers on the challenges facing them ahead.

Two factors have emerged as significant issues: internalisation of investment management by clients (25 per cent) and consolidation of super funds (29 per cent).

However, fears about consolidation are down from 49 per cent last year, indicating managers believe the volume of large mergers is decreasing. 

Concerns of fund managers

Fund management concern Percentage
Consolidation of super funds 29%
Internalisation of investment management by clients 25%
Pressure from clients for fees to contract and impact on revenue 19%
Regulation 10%
Other 8%
Markets  7%
Ability to attract and retain talent  2%

Source: Frontier, October 2023

According to the study: “Over time the challenge of internalisation has been growing in terms of its prominence in responses. This year it has almost climbed into the top ranking with 25 per cent choosing it as their most significant issue.

"It is obvious that, while consolidation continues to loom as a threat for managers (and for consultants as well), the majority of that appears to be behind us and the challenge of larger internal teams now looms as the more immediate threat for managers looking to cling on to mandates.

“There is substantially more money needing to be invested in the superannuation system now, but the concentration of that money across an ever-reducing number of funds is clearly causing concern for fund managers with respect to their operations.”

The percentage of fund managers who believe they should be remunerated on performance and that external fund managers provide a depth of research and developments that cannot be matched by internal teams is unchanged from 10 years ago at 33 per cent and 45 per cent.

However, this contradicts 39 per cent who believe internal teams are best placed to research and advise on investments for their fund. 

When it comes to fees, large super funds (those over $50 billion) are nominated as the most fee-sensitive investors followed by smaller super funds and insurers. Fund managers also feel super funds focus too much on minimising costs and not enough on maximising returns.

Some 83 per cent of fund managers feel returns are being compromised in a bid to keep costs low.

"In our most recent survey, 83 per cent of managers feel returns are being compromised in the quest to contain costs. This score has been steadily climbing each year since 2015 (70 per cent).”

Despite challenges, 93 per cent of fund managers are predicting business growth between now and 2028, although Frontier noted the figure has been as high as 97 per cent in 2016. 

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