Hunting for growth in a mature market

Why does growth matter?  This is a question we field more often than you might expect.

It’s a question which will be confronted more often in a super industry where growth generated from members and net cashflows is now only marginally positive in many cases.

“Why does growth matter” is an easier question for the retail players to answer.  Shareholders expect growth in profits over time, and it’s much easier to achieve that from a business which is experiencing growth in top line revenues.

Not-for-profit funds on the other hand are driven by an obligation to act in the best interests of members.  This is generally interpreted as maximising net benefits or outcomes for members.  Growth is not of itself an objective for not-for-profit funds, so therefore the question arises why it matters at all.  For it to matter, it must be implicit to maximizing outcomes for members.  And it turns out that growth does matter, in a range of ways including:

– Larger, growing funds are more likely to have lower costs

– They have a better ability to invest in products and services for members while keeping fees competitive

– They have more flexibility and options when it comes to investing, particularly in relation to illiquid assets

So growth matters to all the dimensions of maximising outcomes for members – growing revenues which allow for investment in member services, lower cost structures, and better investment returns.

Bigger is not necessarily better.  In fact bigger can be really bad, as there are dysfunctions, particularly organisational dysfunctions, which come with size.  But that said, there is generally a version of bigger which is indeed better for members than smaller – the challenge is to locate that version.

So where to find growth?

Given that for most collective funds, regardless of type, the stock of assets is now a much larger source of growth than the flow of new members and assets, the tempting answer is to let investment markets do your work for you.  When you’ve assumed equity returns of 5% in your annual budget, and you get 15%, you look like a hero – so long as your revenues are based on AUM (this doesn’t work for most not-for-profits of course).

That said, it works both ways – when equity returns are -15%, you look more zero than hero.  Incidentally, this is going to create a dilemma for some for-profit competitors.  As wealth starts to look low margin, low growth, more capital intensive, with increasing revenue volatility, it’s not exactly the annuity-like, capital-lite, earnings play that was promised to boards. Some wealth business owners are going to be asking why they are in this game.

The bottom line is that whether a fund is for-profit or not-for-profit, it needs material organic growth in order to be a healthy business which is  able to deliver good outcomes for members and / or shareholders.

One of the potential sources of organic growth is member growth, but in a market where member growth is 0-1%, that’s obviously not going to work for everyone.  It can work for some, of course:

– Funds targeting segments with superior member growth; such as HESTA which is located in healthcare .  This is about as good as it gets in terms of industry exposure.

– Funds which are superior in taking members from others; such as BTFG and CFS (using branch and advice footprints) or AustralianSuper (via employer and consolidation).

The other source of growth is net member cashflows.  This also is getting harder as as memberships mature.  Some cashflow factors are largely outside the control of the fund – there’s only so much a fund can do about the growth rate of employer contributions for example.  So it becomes important to be as effective as possible where a fund does have influence over cashflows – member roll-ins, member contributions, and outflows, particularly at retirement.

Some of this is about harnessing technology to make account consolidation as simple and paperless as possible – ANZ’s Grow app being a good recent example.  Some is really hard – building a quality, scaled-up advice capability for retiring members being a case in point.

But some of it is a game of inches where disciplined marketing and operational processes and implementation make the difference.  When member numbers and cashflows are finely balanced, picking up an extra 100bps of growth from better harvesting of members’ super balances held elsewhere, or better retention of retiring members, can make all the difference.