From hurdler to hero
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Mass consolidation is a much-studied phenomenon of the corporate sector, riding the economic boom/bust cycle—but it is a first for Australia's $3 trillion superannuation industry (see Australian Prudential Regulation Authority (APRA) Quarterly superannuation performance statistics highlights: September 2020). The merger, or 'horizontal integration', of APRA-regulated superannuation funds en masse will define the future for an industry approaching its 30th birthday.

If this is done well, surviving funds will deliver investment solutions that better match the needs and preferences of fund members, at lower cost; and fill the void banks have left in becoming a trusted financial wellbeing partner to members. But done poorly, 'scale dividends' will be meagre, members will face more limited, ill-fitting options that simply pass on market returns, and culture dilution and 'mission drift' will substitute superannuation funds as the neo-bank conglomerates of the future.

Further, all this is subject to the federal government's (government) overarching policy success measure. That is, whether the superannuation system will, in time, lower the bill for supporting Australians in retirement (versus a government-funded Age Pension). These are high stakes indeed.

The 'story within a story' here is one of investment consolidation—how to deal with multiple, overlapping investment strategies as two superannuation funds become one. Not just consolidation, this will be a process of investment rationalisation as funds make crucial decisions about which strategies will 'make the cut'.

The classic transition management playbook would require merging funds to analyse their combined 'legacy portfolio' and define the 'target (destination) portfolio' in the merged entity, before implementing through careful transition management. But right from the start, most funds will face a crucial stumbling block. That is, a lack of transparency about what each fund's aggregated holdings look like separately and combined, as they come together. How can merging funds rationalise investments wisely without transparency over their start or end points?

This paper describes this challenge through the eyes of two hypothetical merging funds, walking through the three key investment rationalisation steps in a fund merger, and shows how the funds can solve this seemingly intractable problem for their equity holdings using a centralised portfolio management (CPM) equity portfolio structure. This set-up empowers the hypothetical funds to look beyond the risk aspects (hurdles) of investment rationalisation and adopt a more opportunity-attuned mindset. In this fictitious merger journey, the fund 'heroes' who emerge are able to identify clear merger-related investment wins and deliver them in a smoother, more agile and less costly fashion.


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