With Australia's biggest super fund, AustralianSuper, announcing yet another merger, this time with the public sector industry fund AGEST, the question is whether super funds are merging for the benefit of their members or to build financial empires.

The good news is that research conducted by SelectingSuper and its corporate partner Rainmaker Information reveals that while bigger funds don't automatically out-perform small ones they are more likely to.

"This means bigger funds are more likely to achieve above average investment returns, which is what you would expect given the extra resources available to them," said Alex Dunnin, director of research at Rainmaker Information.

"Smaller funds smartly run by shrewd and strategically minded executive teams can do just as well but members need to make sure they are in one of these better run small funds," he said.

Dunnin said the findings are based on an analysis of the last 10 year's super fund returns that revealed 60% of larger funds with more than $15 billion in assets under management beat the market average compared to just 20% of smaller funds that have less than $2?billion. Reinforcing the results, about 50% of mid-size funds beat the market average.

Dunnin said the research analysed rolling returns over 1, 5 and 10 years to end June 2011 for workplace not-for-profit super fund default investment options. Retail funds weren't included in the analysis as trustees in these funds manage their assets less pro-actively and because retail funds are generally much younger funds with shorter track records.

Dunnin said you need to look at the results this way because simplistically analysing the relationship between a fund's size and its return shows no pattern whatsoever.

Dunnin said the research results reinforce why more super fund trustee boards are exploring fund mergers. "The research highlights why the purpose of fund mergers should be investment outcomes, not just to save a few dollars in administration fees, savings that often don't eventuate," he said.

Merging funds will result in Australia's leading funds becoming increasingly large and this may make them prone to conservative investing. But funds are avoiding this temptation by using large numbers of investment managers so even though the fund is big the investment mandates underpinning them can be much smaller.

"This enables investment managers to remain nimble and opportunistic when they need to be while also providing the large volume scale for the overarching funds when the bigger deals come along," said Dunnin.

This heightened focused on investment outcomes is manifesting itself in other ways too, such as in more funds appointing their own in-house Chief Investment Officers, conducting their own research into investment managers and by them increasingly challenging the advice of their asset consultants - which doesn't undermine their advisers but ironically enables trustee boards to get the best out of them.

This tougher investment focus, especially following the GFC which has put huge pressure on super funds to explain their investment strategies to their members, conversely means members should end up having less tolerance for under-performance.

"Australia's larger super funds are amassing portfolios larger than those controlled by the external fund managers they are appointing, resulting in super funds in reality becoming multi-managers in their own right and that's how they should be judged," said Dunnin.

Dunnin said funds becoming big does have its risks, however, because they can lose touch with their members. But this risk can be overcome with marketing and communication plans built around their community of members, such as their home industries, employer associations, unions, and distribution networks and through strategic branding campaigns.

"In some cases this might mean funds, even not-for-profit super funds, selectively sponsoring community or sporting events just as the retail wealth groups already do. Criticising them for doing this is ludicrous, especially as it's an incredibly efficient way for funds to reinforce their brands amongst their membership," he said.

The proviso is of course that funds must maintain their investment focus and keep their fees low, said Dunnin.

This shift to more extremely large funds will have other results as well.

"By the end of this decade Australia's largest super funds could each be managing more than $100 billion. It would make them larger than the current ASX market capitalisations of our major banks," said Dunnin.

Dunnin said the irony of Australia's super funds becoming so large is, however, that there are so few home grown fund managers large enough to absorb this investment volume.

He said only 43% of the money in Australia's investment market is managed by Australian-owned managers. "Australia's growing superannuation funds provide local fund managers with a huge opportunity," he said.