Originally published by UBS Asset Mangement
News out last week revealed that Kinetic Super, a Link client, is discussing a merger with SunSuper. Fund mergers, especially by smaller funds, make sense and are being encouraged by APRA in order to achieve greater scale. Industry consultant RiceWarner's recent report argues that funds with less than $2bn in assets under management or 100,000 members should merge, noting that 92 of 244 funds have less than $2bn in AUM and have higher average fees.
Link's 5 largest clients have almost 6.7m members and their top 10 have 7.7m members (including 270,000 at Kinetic). Link also administers a number of smaller funds, with more than 2m members, (although around 870,000 are in AUSF with small balances and very low fees). We believe that Link should be an overall beneficiary of fund mergers, given their lowest cost offering. Analysis published by Deutsche Bank (DE:DBKGn) before around the Link IPO indicated that Link's charges were some 60% below the average cost of 10 funds with more than 5m members that they identified were opportunities for Link at the time. These funds were also large, so the savings are likely even greater for smaller funds. Although as the Kinetic announcement showed, the impact of fund mergers has the potential to be lumpy, as Link administers some of the smaller funds too.
We have done some analysis using publicly available data from the funds' own annual reports. The Kinetic merger makes sense. The fund has average expenses to assets of around 1.36% despite reasonable scale of than 270,000 members and $3bn in assets. This compares to SunSuper at 0.36% and due to its greater scale of 1.3m members. SunSuper's fees are well below the industry average and the fund is one of the top 10 by total assets with more than $39bn. If we assume that Kinetic Super moves to SunSuper's insourced administration and the fees drop to the same level as SunSuper, Kinetic's members would save almost $33m or 74% of their $44.7m costs.
In comparison, AustralianSuper and Hesta, both Link clients, have an average fee of around 0.25%, more than 30% lower than SunSuper. SunSuper's fees are more in line with MTAA, a Link client around ¼ of SunSuper's size. This highlights Link's tremendous scale advantage. If SunSuper were to move to Kinetic Super's outsourced administration with Link, and was able to bring their fees into line with Link's other similar sized clients, we estimate that the savings are potentially much greater. In addition to Kinetic's members now saving approximately $36.5m (an additional $3.5m p.a.), SunSuper's own members would be around $39.8m better off. The combined savings of $76.3m compare to an estimated $33m under the insourced model.
Link has successfully migrated more than 6m clients onto its own systems in the past 2 years, so we know they have the ability to onboard new, large clients. With those migrations now complete, Link's own clients are now more able to seek out mergers. We also see a large potential opportunity in corporate super, where superannuation fund administration is unlikely to be seen as a core business, although Link's current client base is likely to focus on industry funds first.
While the numbers are only rough estimates due to differences in disclosure, average balances and using incomplete data, the magnitude of the potential savings is enormous. This puts Link's clients in a very strong position to benefit from further consolidation.