Report: Amid Rising Popularity of Mergers, Australia's Superfunds Should Remain Wary of Drawbacks

Research conducted by Russell Investments warns that the growing trend for mergers among Australia's industry superannuation funds may not be serving the best interests of members.

(August 23, 2011) — A recent report by Russell Investments asserts that the burgeoning trend for mergers among industry superannuation funds may not be serving the best interests of members.

The report — titled “Future Proofing for Industry Funds” — states that while Australia’s superannuation funds merge to create scale and cost efficiencies, members may be better served through mutually beneficial partnerships with other funds. According to Russell’s managing director of industry and government funds Michael Clarke, some mergers may be successful in delivering economies of scale, but over a certain point, complexity can be added because larger asset pools pose additional challenges.

“Growing the volume of funds under management (FUM) and then members you think would deliver more scale economy, but the demonstrated experience is that was not achieved between 2004 to 2010,” Clarke says in the report. “So I am highlighting the fact that achieving economies of scale or what you would hope to get really is something that’s got to be achieved through business strategy and directly targeted. It doesn’t just come with growth and it is quite difficult to get those outcomes.”

The challenges associated with mergers, according to Clarke, include increases in technical governance skills required by trustees as investment complexity grows; accessing increased numbers of managers with growing monitoring and implementation costs; the costs of growing internal investment teams; and the challenges associated with accessing and managing global asset portfolios.

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Additionally, the paper notes that funds are most efficient at roughly one million members and $20 billion in assets.

“We’re not saying mergers are never appropriate, but rather funds should be aware alternatives exist that have the potential to deliver better member outcomes,” Clarke says, adding that he encourages funds to consider tailored outsourcing partnerships as an alternative.

Click here to see GC Australia — a sister publication to aiCIO — that focuses on the Australian superannuation and alternative fund industry, from a securities services perspective.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

In a recent report, ratings agency Standard & Poor's revealed that state and local governments are likely to face credit downgrades following a finalization of the US budget.

(August 22, 2011) — Standard & Poor’s (S&P) has stated in a recent report that state and local governments will likely face credit downgrades following a finalization of the US budget.

This comes after S&P became the first agency to ever lower the nation’s sovereign debt rating to AA+ from a perfect triple-A.

The report, titled “State And Local Governments Face Fiscal Challenges Under Federal Debt Deal,” noted that the US Budget Control Act of 2011 — which already includes at least $2.1 trillion in deficit reductions over the next decade — could have an effect on S&P’s view of municipal credit quality.

“In our opinion, the longer-term deficit reduction framework adopted as part of the BCA could undermine the already fragile economic recovery and complicate aspects of state and local government fiscal management,” said credit analyst Gabriel Petek in a statement by S&P. “Either of these outcomes could potentially weaken our view of certain individual credit profiles of obligors across the sector.”

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This year, S&P has revised its credit ratings for a range of state governments. While six states have received upgrades, including South Dakota, and Wyoming, New Jersey and Nevada have had their ratings dropped.

Earlier this month, for example, Fitch Ratings downgraded New Jersey’s bond rating a notch, citing the state’s failure to make full pension payments and its sluggish economic recovery despite proposed pension reforms. New Jersey’s rating is now among the lowest in the nation, and could make it more costly for the state to borrow. Only California and Illinois have ratings lower than the AA-minus Fitch gave New Jersey. The move by Fitch Ratings is the third time in less than six months that Wall Street has downgraded New Jersey’s bond rating. In addition to S&P and Fitch, Moody’s also gave New Jersey similar low ratings.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742