(March-2002) Starting to call Australia home

It’s not a question of whether overseas fund managers should come to Australia, but rather why they wouldn’t come, says Rainmaker Information’s research director Alex Dunnin.

“The Australian retail and pension markets are among the leading markets in the Asian region and for any overseas manager trying to penetrate this region, they simply have to tackle Australia,” he says.

Unlike other markets in the region such as Hong Kong and Singapore, which are still emerging, Australia’s market is open and competitive, with comparatively few regulatory barriers.

The country’s regular inflows into retirement savings, underpinned by the superannuation guarantee, has helped make it the fifth-largest superannuation market in the world. It’s also a market that is expected to continue to blossom, with some analysts projecting that its value will top $1 trillion in 10 years time. Also, Australia’s growing appetite for offshore investments is increasing the opportunities in the market for foreign fund managers.

“Superannuation funds have increased their investments in overseas equities, with some of the larger funds having a weighting of 50-50 in terms of allocation and some intending to perhaps go as high as 80-20 international to domestic [equities],” says ING investment management national sales director Christopher Gunns.

In the past, new entrants trying to enter the Australian market adopted a ‘fly-in’ approach to promote their fund. They flew into Australia to liaise with clients and attract new business, but soon flew out again.

This has changed in recent years, however, with many of the world’s largest global fund managers — including Fidelity, State Street, Vanguard, Alliance, Barclays Global Investments, Wellington, Templeton and Scudder — setting up a permanent presence here.

Nonetheless, Mercer Investment Consulting’s head of research Greg Liddell believes the pace at which new players are entering the market has slowed in the past 12 months, the result of the global downturn and market rationalisation with a string of global acquisitions taking place like Alliance’s takeover of Sanford-Bernstein and Deutsche Asset Management’s recent purchase of Zurich/Scudder.

There have also been some exits from Australia. Baring Asset Management closed its Sydney office opting instead to service the market from its base in Hong Kong, while JP Morgan closed its Melbourne office and now administers Australia from London.

Gunns, who managed Baring’s Australian office, says the group’s decision to shut shop here was part of a drive to maintain economies of scale and was in line with what Barings had been doing elsewhere around the world.

“If you’re a global fund manager you will tend to focus on two of the biggest markets, namely the US and Europe.

“While the US has pretty much matured, Europe, like Asia, is emerging, but there are billions and trillions of dollars involved,” he says.

“So if you had an organisation like Barings, which has a major European presence, why would you be bothered to invest in Asia, which would only represent 5-10 per cent of assets under management when potentially a third of your business could be coming out of Europe?”

American Express Asset Management (AEAM), which previously serviced the market on a fly-in basis, is the newest entrant into Australia. Since late last year it has been establishing a permanent office here, headed by director of marketing Australia and New Zealand, Martin Franc, who it lured away from Ausbil Dexia.

“We will expand the brand equity American Express has developed in cards and travel to include managed funds,” says Franc.

He adds that AEAM has multi-dimensional product capabilities and while it will focus on equities, it will also offer a debt product and alternative product (a sector-specific fund based around emerging and volatile markets, including telecommunications, media, technology, biotech and pharmaceutical stocks).

Demand for international equity offerings remains strong, but what is growing is the Australian thirst for offshore alternative investments.

BNP Paribas director Robert Harrison adds that the trend is away from one manager looking after a balanced fund towards adding more managers focused on specialist investments.

Global fund managers are now offering a wider range of products, and there has been a push towards hedge funds and REITs (Real Estate Investment Trusts). Another emerging trend is an increasing move towards adopting active managers rather than index-based models. “Active managers have demonstrated that they can consistently outperform index-based managers over the past five years,” says Harrison.

To remain competitive and meet increasing demand for offshore investment products from local super funds, many of Australia’s local fund managers are forging relationships with their overseas counterparts.

They gain by obtaining new products without making large investments in systems or personnel. At the same time, the international partner can enter a new market it may not have previously considered or have been able to enter because of the establishment costs or because it lacked the local knowledge needed to be competitive.

Rainmaker’s Dunnin explains: “A foreign fund manager might believe the local manager has a greater ability and better access to finding local customers ... The international manager may also believe there is no competitive advantage for its own presence, instead preferring to find a local partner who is already recognised and can represent it in the market as its agent.”

Liddell adds that local managers that form alliances with overseas managers gain increased credibility in assets classes they do not specialise or have the expertise in.

Credit Suisse Asset Management’s head of international shares Russell Bye warns: “Just because a product has done well overseas, doesn’t mean that success will translate long-term in the Australian market. The product needs to be adapted to meet the needs of Australian investors.”

A number of alliances were formed last year to take advantage of the surge in demand for alternative investments like hedge funds. “This is done by the local manager badging the offshore manager’s products,” notes Liddell.

Some of these alliances include Colonial First State’s relationship with Harcourt, a European-based hedge fund specialist, Melbourne-based fund manager Warakirri and US fund Mesirow, as well as Rothschild Australia Asset Management and Grosvenor.

Tie-ups on the global socially responsible investment (SRI) side include Tower Asset Management’s deal with Storebrand Investments, Norway’s largest financial services group.

“Super funds are getting larger and are able to support more sophisticated structures, hence the growing demands for specialist managers. This has attracted and will continue to attract new players,” says Liddell. “Product is also more specialised in the various assets classes, so you have a wider range of managers entering the market and the increasing introduction of niche products.”

BNP Paribas director Robert Harrison agrees. “The marketplace has become more discerning and specialised, and is looking for the best manager in each asset class as opposed to looking for a manager that is good at everything,” he says.

For this reason, BNP Paribas did not rely solely on the European-based products of its French-based parent, but also offered other specialist managers to the Australian market through alliances.

MFS oversees its global equities and Fisher Francis Trees & Watts (FFTW) handles its global bonds needs. And, at the time of going to print, BNP Paribas was poised to announce a joint venture relationship with Overlay Asset Management (OAM), which will manage its international currency product, and another with Paris-based fund manager Fauchier to administer a hedge fund.

The advantage of establishing these alliances, says Harrison, is that they provide the opportunity to ‘up-sell’ BNP Paribas’ other products to its client base and to meet the market’s demand for investment diversity. It’s also an opportunity to gain new customers.

Tower Asset Management’s general manager investments Guy Hutchings says the growing tendency to form alliances with specialist global fund managers is not too different to implemented consulting. It involves a funds manager examining its core competencies and then deciding if it can add value or whether it would be better to outsource instead and become a distributor.

For its part, Tower has implemented a four manager regional structure to secure its products. It uses Marathon for European equities, Alliance-Bernstein for US equities, Martin Currie for investments in Japan and the Pacific Basin, and Deutsche Asset Management for emerging markets.