Not overly material to PNI but note Hyperion loss and just general info how hard it is there for active managers - even those that are performing given pressure on fees. The lavish decades are over.

Big super mergers create havoc for fundies as mandates get yanked

Funds management firms are increasingly on edge about large customers yanking money from them – and rightly so.

The rationalisation and mandate losses sweeping through the local funds management sector are causing a shakeout and hollowing out of the industry. These forces aren’t abating and the heightened fee pressure is set to leave the industry looking markedly different by the decade’s end.

It’s clear the days of fund managers raking in easy money ended long ago. And with the number of mandates being awarded across the industry dramatically shrinking, pressure is only intensifying this year, meaning further firms will decide shutting their doors is the better option.

The growth of the retirement fund sector has come at the same time as many of those funds have merged, creating havoc for external money managers. 

The merger of CareSuper and Spirit Super – which created a $53 billion fund – is the latest pressure point. It is this month sending shockwaves through parts of the domestic investment management industry. The combined group has conducted an audit of many of the firms it hires to manage its Australian equities portfolios, deciding to cull several from its roster.

While some firms have escaped being cut, many of their mandates are set to be reviewed in coming months and further names will likely be shed, multiple people briefed on these matters said.

Already Hyperion Asset Management has lost its place in the CareSuper equities stable, reflecting a mandate worth almost $408 million. Tyndall Asset Management – which managed almost $469 million at June 30 for Spirit – has also lost out in the wash-up of the merger.

Earlier this month, Sydney-based small cap boutique Celeste Funds Management decided to call time on its entire business after 27 years, citing the loss of a mandate. Celeste was among firms managing money for Spirit Super, and was obviously not immune to the pressure enveloping the industry. The latest accounts for Celeste’s small companies fund showed its operating profit more than halved to $1.3 million in the six months ended December 31, compared to the prior corresponding period.

While the total pool of money being managed across Australia isn’t necessarily changing, what’s clear is the industry’s composition is. Part of the rationale at industry funds for having fewer managers with bigger mandates is that the fees typically decline when they top $1 billion.

The shift, however, is stifling diversity in the market, seeing more money shift to cheaper and passive investment styles and concentrating further funds in the ASX’s largest stocks, including Commonwealth Bank.

“I don’t think (fund) members are being well served by this,” one fund manager told this column on the basis of anonymity. The fund manager does not manage money on behalf of Care/Spirit Super.

Other firms that managed money for the merged industry funds as at June 30 – and may be anxious about mandate decisions -– include DNR Capital, Schroder Investment Management and Ubique Asset Management.

Last year, it was Cbus causing unrest in the sector, when it consolidated several mandates and handed as much as $1 billion to an existing manager. The funds landed with Magellan Financial’s Airlie Funds Management.

Peter Cooper’s eponymous Cooper Investors suffered a string of mandate losses, including in the latter half of 2024 and this year, amid personnel changes and performance issues in some of its funds.

Industry funds from Rest Super to HESTA and Team Super – and separately Perpetual’s wealth unit – either pulled mandates or reduced the size of those with Cooper Investors over the past 10 months.

Alongside the fee pressure, fund managers are also having to explain their decisions and any dip in performance in detail. Of course, some level of consolidation where performance has disappointed and managers can’t offer consistently above-benchmark returns or a real point of difference, is welcome. But what’s happening here goes well beyond that.

This month’s mandate losses have caused huge transition flows through the ASX as funds are transferred elsewhere. Heavy trading volumes in stocks including appliance group Breville and engineering firm Downer EDI in the past 10 days, have piqued the interest of those watching the flows and seeking to ascertain where the money is headed.

If the current trend is anything to go by, further bloodshed is likely.

Mercer this year predicted the nation’s compulsory retirement savings sector would shrink from 89 players to just 32 over the next decade.

Local fund managers are navigating a host of negative factors that can collide and easily spell the end of their firm. Among those are mergers of industry funds, the rise of exchange-traded funds and passive investing, the decline in the number of financial planners in Australia and industry funds taking more of their investment management in-house.

Then there is the prudential regulator’s annual performance test that has some funds very closely tracking indices for fear of failing the metrics.

A report by data and insights firm Rainmaker exemplifies how much tougher funds management firms are having to fight for fewer mandates.

It found the number of mandates awarded by investment managers and not-for-profit funds roughly halved to 70 in the 12 months to December 31, from the prior year. In 2010, there were more than 700 mandates awarded over the 12 months. By 2014, the figure stood at about 400.

The results do need to be interpreted with caution, however, given the data is self-reported by funds and incorporates mandates beyond equities.

Compliance and regulation costs, scale benefits and seeking out lower fees for members are among the factors driving industry fund mergers.

Already this year, Qantas Super has folded into Australian Retirement Trust and further tie-ups are anticipated, albeit at a slower rate than the past five years. Mergers have characterised that period, in part as the prudential regulator strongly urged smaller funds to combine. Media Super, for example, became part of Cbus in 2022. Australian Retirement Trust was formed through the merger of Sunsuper and QSuper.

The mergers come as funds and a smattering of family offices are also managing more money in-house rather than awarding mandates to local fund managers. The results of that trend will also need to be measured over time. One outlier is Hostplus, which hasn’t joined the internalisation push.

Casualties in the funds management industry already include quant fund Redpoint Investment Management, small cap investor NovaPort Capital, and boutique Ethical Partners Funds Management.

Consolidation has also played a role with Antipodes Partners snapping up Maple-Brown Abbott, Yarra Capital Management acquiring Nikko Asset Management’s Australian business and Regal Partners buying firms including VGI and PM Capital. And ASX-listed Platinum Asset Management – which is in the crosshairs of a potential merger with L1 Capital – may be subject to a transaction if terms can be struck.

While it appears dramatic, what’s happening in the fund management sector is not that dissimilar to global trends that are playing out.

European analysis by EY in March put the wealth and asset management industries at “an inflection point” due to years of disruption and reinvention. It noted that while firms had traversed multiple financial crises and lingering geopolitical instability, proving an ability to adapt, the challenges ahead were shaping up as more complex and unforgiving.