December 2017

EVENT REPORT: Aiming insights at the Australian market

Calastone_Connect_Forum_SidneyFunds Global Asia presented the results of a survey of its readers at a conference hosted by Calastone in Sydney. With a well-funded pension system that is the envy of many developed countries, Australia boasts one of the most mature funds markets in Asia. However, it is also a nation with an established home bias. Australians hold about two-thirds of their portfolios in Australian equities, according to research by Vanguard Group, despite the asset class accounting for less than 3% of global equity market capitalisation. In fairness, Australian equities have served their country well in recent years. This is due, in part, to Australia’s comparative independence from global markets, which has made its economy unusually resilient. While the US and Europe were mired in the worst of the 2008 financial crisis, Australia surfed the wave as adeptly as a professional at Bondi Beach. As a result, the country recently achieved a remarkable record by registering its 104th consecutive quarter of economic growth. It has been 26 years since Australia was in recession. Can the good times last? Respondents to a survey carried out by Funds Global Asia would rather not take a chance. According to 94% of the Australia-based funds professionals in the survey, it is important for Australian investors to diversify their portfolios with exposure to managed funds that invest abroad. Clearly, the view of the funds industry is that Australian investors should not put all their eggs in Oz. Survey findings
Funds Global Asia presented the findings of the survey at a conference in Sydney organised by Calastone, a global financial technology company. One of the main conclusions drawn by the research was that there is an opportunity to educate the Australian market about the options available for gaining overseas exposure. Respondents were asked to pick which factor was the most significant in preventing Australian investors from increasing their allocations to managed funds that invest abroad. The most popular choice was “lack of education”, attracting 53% of the responses. “Tax or regulatory issues” came second with 22%, following by “lack of investor demand”, “problems with Asian passporting” and “not enough products on offer”, which each attracted relatively few responses. Another question indicated a lack of knowledge among respondents themselves. When asked about a licensing change in November 2016, in which the Australian regulator allowed institutional investors to buy Luxembourg-domiciled Ucits funds without their needing a licence, 44% of respondents admitted they had not heard of the development. This last finding might be explained by a general lack of enthusiasm in the Australian market about Ucits products. Only 30% of respondents thought Ucits funds were likely to become an important part of the product mix in Australia. There was slightly more enthusiasm, though still a number of sceptical opinions, about whether funds launched under the incoming Asia Region Funds Passport (ARFP) would succeed in Australia. About half (49%) of respondents thought ARFP funds would be significant in increasing Australian investors’ international exposure. Scepticism
Why is there so little confidence that cross-border fund vehicles such as Ucits and ARFP will gain investors in Australia? This is partly explained by the maturity of the Australian market. Local investors already have access to locally domiciled funds that invest in a variety of geographical regions. The fact that many choose to stick to their home market reflects a cultural preference for domestic investing, not a lack of access to funds that invest offshore. Could greater accessibility of Ucits funds increase Australian investors’ overseas exposure? Perhaps. But the conclusion of the research is that mere accessibility, by itself, is not the critical factor. That will not stop Australian asset managers trying to participate in the ARFP scheme, however. Many firms hope to develop their overseas businesses by launching funds under the passport. But, for many firms, the objective is to raise assets from countries elsewhere in Asia that are participating in the programme. The Australian government is, naturally, supportive of Australian firms raising assets from investors in, for example, Japan. Those extra assets, managed in Australia, will create jobs and develop the local industry. It remains to be seen whether Australian investors will be champing at the bit to buy ARFP funds domiciled in places such as Korea or Thailand. Experts speak
A number of experts shared their views on the Australian funds industry during the Calastone conference. The journalist Michael Pascoe gave an amusing talk on the economy. In it, he remarked that Australia’s 26 recession-free years made it “the world champion of growth”. However, he bemoaned the fact that his fellow citizens had responded to this impressive record by “whingeing”. The problem, he said, was that many Australians were too young to remember what a recession was like. “For a generation of managers, the only thing they managed under hard times was their lunch money,” he said. Pascoe argued the government should increase spending on infrastructure, stimulate wage growth, and champion a pro-immigration policy that recognises the positive effect of Australia’s new arrivals, many of them from Asia. These measures would ensure a healthy economy in the years to come, he said. Elsewhere, Rocky Scopelliti of Telstra, a telecoms firm, argued that fund companies should consider how they will serve customers who were born after 1980, a demographic segment otherwise known as millennials. The future profitability of an organisation, he claimed, depends on its ability to attract and engage these kinds of clients. Another hot topic during the day was the question of robo-advisers. Services of this sort are designed to recommend investment portfolios automatically based on user inputs. In the US, robo-advisers have scooped up a significant portion of the market. Given that these services often recommend passive funds, such as exchange-traded funds (ETFs), they have been seen as a disruptive force in asset management – with the potential to diminish revenues from active asset management. ‘Worse decisions faster’
Rebecca Jacques of the Association of Goals Based Advice was sceptical that robo-advisers would become an industry standard. In her experience, most robo-advice services were too simplistic and failed to provide necessary information about tax or investment objectives. Andrew Inwood of research firm CoreData agreed with this pessimistic view and quoted an unnamed regulator who said robo-advisers achieve “worse decisions faster”. Although not every delegate had so little confidence in robo-advice firms, the comments from the panel met with much agreement. The upshot of the conference is that Australians can be forgiven for their local bias. The country is home to a mature, rapidly developing funds industry. In this busy environment, there is plenty to do at home. ©2017 funds global asia

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