Morningstar's Industry Pulse report, penned by equity research analyst Shaun Ler, forecasts an expansion in both size and influence for profit-for-member funds.
The report highlighted that industry funds wield considerable power through default choice and mandatory contributions, placing pressure on fees while leveraging a wide array of investment opportunities, including unlisted options, thanks to their scale.
But the mounting popularity of industry super funds is being propelled by the ongoing shift away from traditional active managers, according to Morningstar.
Namely, as capital flows diverge from actively managed asset classes, they gravitate toward low-cost exchange-traded funds and superannuation.
While ETFs offer diversification, lower fees, and easy access, Morningstar explained that default "MySuper" investment options are prized for their simplicity, cost-effectiveness, and diversified portfolios.
It predicted the shift to ETFs and industry funds from active managers to persist well into this year.
“Net outflows since early 2022 are a blow to active managers,” Morningstar said.
“Many underperformed passive funds amid the market downturn—contrasting with the usual claims. While some funds were recently reallocated to active managers, flows are sporadic, and their competitive positions are weakening”.
The report also suggested that only market gains and client flows from other active peers are likely to drive flows for active managers.
Traditional active managers, it said, will have to “perform and adapt, or lose”.
According to the research, the most popular active funds in the year to January 2024, were from low-cost quant funds, newer boutiques excelling in non-traditional assets, or large diversified managers.
Among the top 10 active fund families by net flows during this period were Metrics Partners, Resolution Capital, Mercer, Talaria and MA Financial, while AMP, Pendal, Schroders, State Street and Vanguard were named among the list of “mature firms with legacy issues likely in outflows”.
While wins are still likely, Morningstar reiterated they would come at the expense of close peers.
“Flows improved at Challenger, GQG, Pinnacle, and Insignia, given robust performance and/or diversified product offerings. Magellan and Platinum face further redemptions, given weaker performance. It’s likely a zero-sum world for traditional active managers,” the report said.
Looking forward, Morningstar said that in the near to medium term, “better-performing and more diversified” firms like Challenger and Pinnacle are likely to have a swifter recovery in flows and operating margins.
However, it opined that Insignia and Perpetual offer the greatest relative value.
“We think the market underestimates flows and the potential value from cost cuts for both these firms”.
