Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 433

Competition and concentration issues in Australian investment markets

It’s been disparaged as 'political theatre' and as 'a solution in search of a problem', but in our view The House of Representatives Standing Committee on Economics is dealing with some meaty issues at present. The task in hand is to “inquire into and report on the implications of common ownership and capital concentration in Australia.” This is motivated in large part due to the burgeoning $3.3 trillion superannuation industry growing significantly, and being forecast to dwarf the domestic equity market in decades to come.

The Terms of Reference also call for an examination of “the changing influence between individual investors and small funds, compared to larger funds.” Disquiet about proxy advisory firms still lingers; and there are reservations about concerted or ‘organised’ action. “This inquiry will ensure that we empower citizens, not organised capital… [as] common ownership risks bypassing democracy”, says Committee Chair Tim Wilson.

Hopefully the Committee will provide a thoughtful ‘compare and contrast’ of participatory capitalism versus, say, participatory justice or participatory politics. Members of juries and voters in Federal elections need no qualifications, no documentation (yet), and no reasons for their votes. There is no cap on membership of a ‘party organisation’. You’re allowed to advise people how to vote. And acting in concert is encouraged, with both hung juries and hung parliaments seen as failure.

Agency problems and misaligned incentives

Governance and agency risks also call for careful consideration. If progressive, university-educated super fund executives vote a social-conscience agenda that’s in tune with urban, pink-collar, worker-member-shareholders, well, that’s not ‘agency risk’, it’s ‘commendable alignment’.

But what if conservative, cigar-smoking company management are of one mind with conservative, cigarette-smoking blue-collar worker-member-shareholders, perhaps in logging or coal-mining industries? What if super fund executives usurp those preferences by managing portfolios, and voting, in line with their own personal (say, anti-tobacco or anti-logging) predilections?

To Wilson’s concern that “a handful of ‘mega-funds’ make all the decisions, and ordinary investors are locked out and higher costs are paid by Australians”, we would have thought that, rather than attempting to restrain the ‘mega-funds’ from fulfilling their responsibilities, the Committee would be better employed in encouraging, if not requiring, the ’ordinary investors‘ to fulfil theirs.

That’s analogous to compulsory jury duty and compulsory political voting. No-one is ‘locked out’. It’s quite the opposite. ‘Ordinary investors’ are entitled to vote as they see fit. Likewise, ordinary super fund members are entitled to exercise choice of fund; and it so happens that many do not.

There may be value, also, in the Committee examining safeguards as to the conduct of company elections. As Joseph Stalin allegedly commented: “Those who cast the votes decide nothing. Those who count the votes decide everything”.

Tensions between scale and competition

Turning from processes to outcomes, Australia’s relatively small, affluent population of 25.6 million is, on the face of it, susceptible to excessive concentration and oligopolistic behaviour. A paper by Sasan Bakhtiari (2019) at the Australian Department of Industry finds concentration is increasing, especially for industries that are already heavily concentrated.

By far the worst examples are in utility-type industries, given economies of scale and high price regulation. In other Australian-focused research, a study published by Gallagher, Ignatieva and McCulloch (2015) found that dominant companies operating in concentrated industries generated significant risk-adjusted excess returns compared to firms in more competitive markets. Interestingly, this experience is the opposite of that found in the United States.

Balancing stakeholder interests

The hinterland, where micro-economics borders macro-economics, is a lawless and turbulent frontier. When an undifferentiated, commodity product such as nickel abruptly triples in price, it’s not because enterprising fossickers in the Kimberley have been texting their counterparts in Sulawesi and Norilsk, in a collusive scheme that channels their inner OPEC. It’s because the global economy has hit its straps.

Even if one were to assume that corporate owners and managers possess more than an illusion of control, and even if their power and concentration is indeed increasing, they are still beholden to the Rule of Law. It will be for the Committee to establish whether the rules of the corporate playing field are adequate, and whether the umpires are adequately resourced.

ACCC Chairs, present and past, have recently been conducting a robust debate on that question. It also needs to be remembered that powerful vested interests have been undermining start-ups ever since Tiberius destroyed the formula for flexible glass. It’s not illegal to invent an innovation, and then not to use it.

Working in tandem with the Rule of Law, to keep corporate and super fund power in check, is the Law of the Jungle. Innovation, consumer caprice, technological change, complacency, and hubris all work tirelessly to undercut the most muscular of corporate behemoths. As a result of these forces, industry concentration is a lot like a lava lamp – an endless cycle of mergers, acquisitions, spin-offs, break-ups and oblivion.

Finally, it’s well-known that economists love paradoxes, and we’d highlight three to the Committee.

First, the Committee will need to decide whether the problem is too much bad intent – “collusion”, in the words of the Chair; or too little good intent – “blunted incentives”, in the words of the Deputy Chair.

Second, it’s hard to blame super funds for asset growth when it’s fuelled by Government-mandated super contributions; or for increasing concentration when the Government regulator, APRA, is pressuring funds to merge.

Third, you can’t criticise the ACCC for allowing a situation where “higher costs are paid by Australians”, when it’s the Government that legislates exorbitant fees for privatised services, in its attempts to maximise the enterprise value it extracts from other companies, private equity and super funds.

 

David R. Gallagher and Graham Harman are with the RoZetta Institute – a university-owned commercial organisation focused on solving industry problems.

 

4 Comments
Ruth
November 14, 2021

Earlier federal public servant pensions are payable from consolidated revenue. The Future Fund is a sovereign wealth fund set up so that those pensions will not be a drain, or will be less of a drain, on future taxpayers. I see nothing wrong with that. Those pensions are taxable. In contrast state pensions had no wealth funds set up and are funded by current state revenues, and are not taxable as they are constitutionally protected funds.

Danny Casagrande
November 14, 2021

I agree that the expanding pool of Superannuation money could be used domestically and profitably to establish and enhance Australian innovative industry and infrastructure. Making us more self sufficient as well as growing industry that can be adopted and sold profitably to other like minded democratic nations.

Ruth
November 14, 2021

That is not the purpose of superannuation.

Trevor
November 13, 2021

YOU SAY :
"The Terms of Reference also call for an examination of “the changing influence between individual investors and small funds, compared to larger funds.” Disquiet about proxy advisory firms still lingers; and there are reservations about concerted or ‘organised’ action. “This inquiry will ensure that we empower citizens, not organised capital… [as] common ownership risks bypassing democracy”, says Committee Chair Tim Wilson."
AND :
"First, the Committee will need to decide whether the problem is too much bad intent – “collusion”, in the words of the Chair; or too little good intent – “blunted incentives”, in the words of the Deputy Chair."
AND:
"To Wilson’s concern that “a handful of ‘mega-funds’ make all the decisions, and ordinary investors are locked out and higher costs are paid by Australians”, we would have thought that, rather than attempting to restrain the ‘mega-funds’ from fulfilling their responsibilities, the Committee would be better employed in encouraging, if not requiring, the ’ordinary investors‘ to fulfil theirs."
THERE is no evidence that "ordinary investors' give a damn about their "Super Funds" or what they do to generate a return ,
as long as it just keeps coming ! Collecting it is SO FAR AWAY in the future , it is seemingly irrelevant to their daily lives !
Occasionally "one or two" 'ordinary investors' point out the HUGE DISPARITY between the "FUTURE FUND'S " HUGE earnings and their less than remarkable , pathetic returns , of THEIR OWN FUNDS , but that soon subsides or is ignored by media !
$248 BILLION socked-away "for the future benefit of Australians" they say !
"In a portfolio update, the Future Fund - set up to cover future superannuation liabilities of public servants - stood at $199 billion at the end of the September quarter, delivering a 10-year return of 10.5 per cent. This compares with a return target of 6.1 per cent." YEAH ! For AUSTRALIANS ! NOT REALLY.....only those employed as "public servants" !
Tim...it seems to me that DEMOCRACY HAS BEEN WELL AND TRULY BYPASSED right there !
AND as for all the "Super Funds" , why not "incentivise them" TO USE THEIR HUGE ACCUMULATION OF FUNDS
to " BUY BACK THE FARM."....re-establish Australian Industries using "Super Funds" in a tangibly beneficial manner......
and ensure "our ability to be independent and self sufficient" and not beholden to LESS DEMOCRATIC REGIMES !!????
How about A RANGE OF ELECTRIC VEHICLES suitable to Australian Conditions , starting with the mining , manufacturing and design and exportation of a SUPERIOR PRODUCT ? And SHIP-BUILDING ? Seems logical for an ISLAND NATION !
And also , commence a NUCLEAR INDUSTRY , from mining all the way through to EXPORTING FUEL RODS and then
recycling and RE-EXPORTING and even our own NUCLEAR REACTORS on our own NUCLEAR POWERED SHIPS !
We have the skills.....but we never seem to have the money ! Why not USE SUPER FUNDS and benefit every AUSTRALIAN?
The INDUSTRIES , once operational , could then be "floated" to individual shareholders if THIS seems more democratic !

 

Leave a Comment:

     
banner

Most viewed in recent weeks

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.

How not to run out of money in retirement

The life expectancy tables used throughout the financial advice and retirement industry have issues and you need to prepare for the possibility of living a lot longer than you might have thought. Plan accordingly.

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

Latest Updates

Investment strategies

Have value investors been hindered by this quirk of accounting?

Investments in intangible assets are as crucial to many companies as investments in capital equipment. The different accounting treatment of these investments, however, weighs on reported earnings and could render ratios like P/E less useful for investors.

Investment strategies

Investors are threading the eye of the needle

As investors cram into ever narrower areas of the market with increasingly high valuations, Martin Conlon from Schroders says that sensible investing has rarely been such an uncrowded trade.

Economy

Persistent, but not permanent

There is universal consensus that the Earth is experiencing climate change. Yet there is far more debate about how this will impact different economies across the globe. New research sheds more light on the winners and losers.

SMSF strategies

How super members can avoid missing out on tax deductions

Claiming a tax deduction for personal super contributions can end in disappointment if it isn't done correctly. Julie Steed looks at common pitfalls and what is required for a successful claim.

Investment strategies

AI is not an over-hyped fad – but a killer app might be years away

The AI investment trend looks set to continue for years but there is only room for a handful of long-term winners. Dr Kevin Hebner also warns regulators against strangling innovation in the sector before society reaps the benefits.

Retirement

Why certainty is so important in retirement

Retirement is a time of great excitement but it is also one of uncertainty. This is hardly surprising given the daunting move from receiving a steady outcome to relying on savings and investments.

Economy

This vital yet "forgotten" indicator of inflation holds good news

Financial commentators seem to have forgotten the leading cause of inflation: growth in the supply of money. Warren Bird explains the link and explores where it suggests inflation is headed.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.