Construction industry superannuation fund Cbus is negotiating a possible merger with fellow industry fund Media Super.
Longstanding Media Super chairman Gerard Noonan said his fund had conducted an extensive tender process and is now in talks with Cbus.
“We’ve been talking with a number of funds in recent months about the prospect of Media Super gaining benefits from a merger with a larger, like-minded fund,” Mr Noonan said.
“Our board met recently and we are considering an offering made by Cbus.”
It’s early days for the potential union, though.
“We’re only at the very early stages of discussion and it will take several months of due diligence to ensure the offering stacks up and is in the best interests of our members,” Mr Noonan said.
A tender process run by Media Super brought out lots of interested parties but all were whittled away other than Cbus and the $180 billion giant AustralianSuper.
The fact that Media Super has entered due diligence arrangements with Cbus means that it was the last man standing in Media’s view.
If the merger goes ahead, Media Super will remain as a separate brand.
There are a couple of drivers that make mergers attractive for smaller funds like Media Super.
APRA and the government have pressured underperforming funds to merge because they are costing members an average of $200,000 over their working life.
Late last year, APRA produced a ‘Heat Map’ identifying underperforming fund, with the regulator’s deputy chair Helen Rowell warning: “If trustees don’t fix these issues within a timeframe that is acceptable to APRA, we will be requiring them to consider other options, including a merger or exit from the industry in some cases.”
However, although there have been some significant mergers in recent times, most have been between well-performing funds.
Media Super and Cbus fall into this category, as well.
Media’s top-performing option returned 17.4 per cent to members in the 2019 calendar year, while Cbus’ returned 15.1 per cent.
Cbus has also performed relatively well during the pandemic’s market shakeout, with the group’s investment chief Kristian Fok saying on Friday that it was on target to make a small positive return of 0.44 per cent.
“We could even make a positive return of as much as 1 or 1.5 per cent depending on what shares do in coming days,” he said.
The other driver for mergers is the constant push for lower fees and efficiencies big funds can offer.
Cbus, for example, has 566,000 members and $54 billion in funds under management, while Media has 78,000 members and $6 billion in funds under management.
Mr Fok said the move to bring investment management in house rather than relying on external managers is starting to pay significant dividends.
These advantages could be rolled out across mergers with smaller funds.
“We brought the investment function in house three years ago and it is reducing costs. Our fees [on member accounts] will likely go down from 65 basis points last year to 57 basis points this year and internalisation has been a big contributor to that,” Mr Fok said.
“Net after-fee income is tracking at $375 million above what we would have achieved using a passive investment option despite the fact that the pandemic has made things very challenging.”
DIY is cheaper
One driver of that performance is the lower cost of management of fund growth.
“Bringing investment in house means you have to develop research teams and systems. But once you do that it doesn’t cost us any more if we double the amount of money we are managing because we have that infrastructure in place,” Mr Fok said.
“If we farm it out out to external groups, there is an extra charge on every extra dollar.
“So the economies of internalisation work really well, particularly if you are a strong, growing fund, like us.”
The second advantage of internalisation is that the investment team had a global view and “could see what was happening in areas like technology and understand what that meant for logistics retail property for instance”.
“When a number of broader stocks were smashed in market, we were able to take advantage by buying stock and making good returns,” Mr Fok said.
Cbus is cashed up to take advantage of further opportunities, he added.
“We have a mandate in long-term ASX equity positions with $200 million invested already and another $300 million still available,” Mr Fok said.
“We’ve got a debt mandate of $600 million available that could be lent to companies needing long-term finance of 10 to 12 years.”
The New Daily is owned by Industry Super Holdings