Pension funds are coming under renewed pressure as they grapple with the sheer complexity that comes with massive growth.
The world of portfolio design and construction has gotten tougher and investment chiefs are encountering more risks.
At the same time, they are ensnared in the fight for specialist knowledge as the push into private assets intensifies.
"The break-neck speed of growth that super funds have experienced over the last decade is hard to absorb," says Frontier chief executive Andrew Polson.
"It's operationally challenging to maintain everything in a very harmonious way," he adds.
As they grow, super funds need to find more ways to deploy their capital through moving offshore and seeking greater exposure to more asset classes.
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According to Polson, the sheer size of the mega funds in the $3.2 trillion superannuation sector can make it more challenging to effectively allocate that capital, particularly at scale and into international private markets.
He is not saying that the mega funds are getting too large, but that at their size, their challenges change.
"The framework to construct portfolios becomes more complex, and managing the risk against various frameworks - including the regulatory framework - becomes far more complicated," he notes.
"There are many more things now that funds need to manage in terms of risk - and therefore portfolio design and construction - than before.
"The larger the investor, the more sophisticated they become in being very granular in sub-asset classes.
Grappling with size
Polson argues that as funds get very large, they require more specialist capabilities, becoming "a much more complex business."
"This is in contrast to the small to medium-sized funds where investment teams have required more generalist skills."
Nevertheless, over time, Polson goes on to say, one of the challenges for the mega funds is how to make sense of all these very specialised sleeves of investment capability.
"When constructing portfolios and managing portfolio risk, they have to manage many more moving parts and risks," he concludes.
Understanding the complexity and drawing information up to a total portfolio level across multiple asset classes is especially challenging.
"It takes more work to integrate all the different views, decide where to make their bets and place their investments," says Polson.
"This is why the size and composition of internal strategy teams are changing and why some of the skills and capabilities needed in the future will be different, including the need for more technical and quantitative skills."
Polson also notes investors are becoming more quantitative to support their qualitative decision-making, including how they think about strategic and dynamic asset allocation and implement that through the cycle.
The upshot of such aggressive hiring has been a talent war between asset managers, alternatives specialists and the big asset owners.
Polson puts this battle in context.
He expects consolidation in the sector will trigger some turnover.
The Frontier chief executive says the big superannuation funds need specialised and focused people.
"Those who had historically found themselves quite happy working in funds management will be happy to work in what are rapidly becoming sophisticated specialised investment houses," he says.
"You will also find some people who are generalist in nature. They probably won't find it as easy to fit into a large fund as the generalist roles won't exist other than at the senior levels."
Polson also believes the highly regulated nature of super is challenging for some people.
"I would be surprised if working under the current regime did not frustrate some people," he says.
"I don't think there are many investors who particularly enjoy the current performance test design and what that means for risk management when it comes to investment decision making, so this will probably result in some turnover."
Yet, he says the the growth of mega funds has only seen one-way traffic towards them.
For instance, a $500 billion Australian Super would almost be in the same league as the largest US fund and will continue to attract global talent.
Managing assets in house
As for managing core assets in-house, Polson says this puts an even greater focus on maintaining a strong culture across super funds.
"Ultimately, super funds are trust businesses with investors inside of them and not investment businesses with the trust bit inside them. These two things are quite different and take a lot of work to make sure they are kept in balance," Polson says.
"It's a strategic challenge to get that balance right.
"Every organisation has to choose its cultural flavour since the stickiness of the insource model depends on a robust cultural framework to manage it well."
For players like Frontier, the gap between the mega funds and everyone else continues to widen.
The asset consultant carries out a lot more project-based work for the largest funds than it has historically. But it still performs a traditional generalist consulting role for small and mid-sized funds.
Frontier continues to assist the big asset owners in reviewing internal strategies, capabilities and governance and providing a second and third opinion on specific risks, undertaking manager searches and research, on how to think about static and dynamic asset allocation or portfolio construction, navigating YFYS, the increasingly competitive landscape and investing beyond Australia.
It has been actively boosting its specialist knowledge and quantitative capabilities.
"We are growing capabilities in private markets, investment governance, and responsible investments and have deepened our capability in capital markets," Polson says.
"Bringing more quantitative capability in modelling, portfolio construction and technology to support the breadth of requirements to best support the needs of our increasingly different clients."
These upheavals come as global financial markets are navigating a difficult inflation environment - one that has been brewing for a long time and stoked by extraordinary policy intervention.
The bottom line is that we have monetary inflation now that central banks have to get on top of. The biggest challenge is for them to dampen demand while having to put up with pretty sticky inflation driven by supply and geo-political problems."
"It is a pretty unusual time when you are raising rates in slowing growth with still full employment and strong demand.
As he sees it, a big part of the inflation story is the mismanagement of the energy transition in developed markets.
Polson wants to see the government take a more progressive role in this transition and to create an environment where patient private capital can invest more effectively in this transition than it is currently able to.