‘Middle ground’ funds will struggle with value proposition

Funds that are in the middle ground between being a behemoth and a niche fund will struggle in the future post-merger environment, according to Aware Super.

Michael Dundon, Aware Super executive consultant – corporate development, was previously chief executive of Vic Super for the decade leading up to the merger with First State Super, which was now Aware Super.

After the merger was completed, he took on his current role with the fund which involved looking after the merger team and activity.

Looking at the broader marketplace, Dundon said it was the funds that made up the middle ground between the dominant super funds and the smaller niche funds that could struggle.

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“Those funds in the middle ground where they are not niche but they’re not big enough to get the scale benefits, it’s going to be hard for them to have a really strong, compelling value proposition in my view,” Dundon said.

“We will probably see those funds consolidate and a number of those funds will end up in ‘destination’ funds, so they’ll do a merger into a large fund and be part of a very large fund in the future.”

Dundon said the industry was evolving quickly and the structure was being driven by the level of competitiveness that we’re seeing across the industry.

“There’s some big funds that are extremely competitive on investment performance and fees, and our view is that there will be a dozen or slightly less large funds of above $100 million [funds under management] and a small number of $250 billion plus,” Dundon said.

“Then there will be funds that are very specific and very niche to some segments so they’ll be quite small but their offering will very tailored to that market segment and they will achieve some scale benefits to outsourcing, collaboration and those sort of things.”

It echoed a similar view of Aware Super’s CEO, Deanne Stewart, who told Super Review in September she expected to see a dozen or so large funds along with room for niche funds.

Dundon said he expected more funds to similarly have dedicated merger teams set up, if they did not already.

“In our case, we have a dedicated team set up, we’ve got a really current playbook of experience that we can leverage each time we do a merger,” Dundon said.

“You’re probably going to see a lot more funds thinking about that aspect because mergers are complex, they’re very time consuming [and] there are different ways to structure these things.

“You want to be working on a merger with someone who’s done it before because there are significant learnings that can be leveraged to really enhance experience.”