Australia’s fund management industry is set to double in assets over the next decade and as many as four new managers a year could launch businesses. Angele Spiteri Paris asks experienced firms about the best business model
Australia’s fund management industry has more than doubled in the last decade, reaching over Aus $1 trillion (€616bn) this year, and this is set to double yet again over the coming decade.
The market, which is the largest in the Asia-Pacific (ex-Japan) region, generates around $50bn to $60bn of assets per year.
The size of the market is down to the compulsory retirement system. Employers are required by law to pay a proportion of all employees’ salaries and wages into a complying retirement fund. This compulsory contribution level is currently set at 9% of salaries.
Given these figures, it doesn’t take a genius to figure out why Australia is an attractive market for many fund managers.
Kimon Kouryialas, country head of Martin Currie, Australia, says: “A lot of people get Australia wrong. They believe they can come to the marketplace and walk away with quite a lot of assets and they’re quite naïve in how they think they can do that.”
Joanna Davison, regional managing director, Australia and New Zealand, at Colonial First State Global Asset Management, says: “Prior to the credit crunch, there were an increasing number of foreign managers in Australia because they saw it as a bit of a honey pot.
“That all came to a big halt about 12-18 months ago when a number of managers who had not been terribly successful withdrew.”
An example is the Allianz subsidiary, Nicholas-Applegate – a US manager with US$8.6bn in assets under management. The firm still sells into the Australian marketplace, but relocated account management responsibilities back to its headquarters in San Diego.
Fidelity is another firm that observers claim did not originally have success in entering the Australian market. One expert in the market says: “Fidelity is one global brand that has had three different shapes in the Australian market over the last 15 years. They first released their products in the mid 1990s. Then in the late ‘90s they made the decision to pull out of the Australian market and made the decision to come back around three or four years ago.” Fidelity was unable to respond before Funds Europe went to press.
Kouryialas, who worked for a number of firms before joining Martin Currie, including Legg Mason and Citigroup, says: “I’ve seen scores come, fail miserably and go back home with their tails between their legs.”
John O’Shaughnessy, deputy CEO of the Investment and Financial Services Association (IFSA) in Australia, says: “Building market confidence to get into the Australian market requires a fair bit of hard work.”
Paul O’Connor, director of wealth management services at S&P Fund Services (Australia), says: “They [foreign asset managers] need some level of patience and commitment, it’s not going to happen overnight. Realistically, a distribution time frame would be two or three years.”
Standard & Poor’s has been researching credit in the Australian market for 20 years and expanded its business to offer investment research five years ago.
But although some foreign managers have had a rough ride, others have managed to crack the Australian market.
Success stories
Baillie Gifford Investment Management, Martin Currie and Aberdeen Asset Management are three native Scottish investment managers that have reaped success in Australia.
Aberdeen has a 2% market share in the region and Martin Currie accumulated about $800m in the space of 15 months.
Martin Currie started investing in Australia, from its Edinburgh home, in 2005, but Allan Macleod, managing director at the firm, says: “It became clear that if we wanted to do it properly we had to have someone down there. So we took the decision to open up an office in Australia at the end of 2007 and Kimon [Kouryialas] came on board in July 2008.”
He says that the firm did not bring in any Australian clients until the local office was up and running. Kouryialas, the Martin Currie representative in Australia, says: “You need to show deep commitment to the marketplace in order to succeed… That’s been the problem with a lot of firms that haven’t done well. They haven’t been able to find the resources in terms of capital and commitment to show the marketplace they are going to be around for a long time.”
Aberdeen is another success story. The firm has been operating in Australia since December 2000 and currently has around £9.2bn (€10.1bn) invested by Australian clients.
Neil Hegarty, Aberdeen’s head of business development in Australia, says: “If you want to operate within Australia you need high-quality, highly rated products. The ratings by consultants and research houses are probably one of the main barriers.”
Scotland isn’t the only nation to thrive in Australia, other countries have scored some success as well. BNY Mellon’s Australian business has grown significantly in the last six years with its assets under management reaching over $16bn this year.
All the Australian experts say consultant relationships are key for foreign asset managers to do well. Much like in the UK, the institutional Australian market is very consultant driven, so cementing
those relationships is vital for the success of a business.
Alan Mearns, CEO of BNY Mellon Asset Management International, says: “We understood the importance of getting the service for the consultants right. We had a dedicated person focusing on supporting our consultant relations and that was important in generating a good understanding of our business model and the quality of our investment boutiques.”
Mearns says that the firm has had good support from Australian consultants and so did other managers that invested in the time and effort necessary.
Aviva Investors is another firm that has done well in Australia. The subsidiary Portfolio Partners was rebranded to Aviva Investors last year and has £3.3bn in AuM. The group has been operating in the market since 1994.
Craig Bingham, chief executive of Asia Pacific at Aviva, speaks of the firm’s experience. “It’s a very competitive marketplace and those who come and are impatient feel like it’s a hard market to crack. You have to serve your probationary period to prove you’re here to stay for the long term and are not just flying in and flying out,” he says.
Distribution
Opening a representative office may be a step better than being a ‘flying fund manager’, but even this will only get a firm so far. Davison, at Colonial First State, says: “However good a representative office is, it’s always going to be a sales rep without portfolio managers. But it’s the portfolio managers that the consultants want to meet.
“On the whole, the model of setting up a representative office in Australia is not very successful.”
She says that setting up a third-party distribution agreement has been the most successful way that foreign asset managers have entered the Australian market.
JO Hambro Capital Management (JOHCM), a UK boutique, is currently setting up a third-party distribution agreement to bring its global equity product to the Australian market.
“We’re at an early stage of penetrating the market,” says Patrick Seth, head of institutional sales and client service. He explains that the catalyst for the firm to consider moving into Australia was the hiring of a global equity team a year ago.
Seth says the firm is very close to negotiating a deal with its chosen distribution agent. JOHCM does not have any Australian clients yet but he says there are a couple of interesting opportunities in the pipeline.
He believes that, particularly for boutiques, using a third-party distributor makes sense. “One of the alternatives would be to open a local office, which would be very expensive and difficult. Another alternative is to fly in every few months, which again is going to be tough given the distance. So this is a good way of doing things,” says Seth.
But not everyone sees the third-party distribution model as crucial. Kouryialas, at Martin Currie, says: “The main reason why I don’t like the third-party distribution model is that you don’t have any culture. Culture is a critical thing in the fund management business.
“The distributors are distributing ten to twelve fund managers and it’s very difficult to know everything about each fund manager. Whereas, I sit in Australia, I work for Martin Currie and I know everything about Martin Currie.”
Setting sights on retail
The foreign firms that have garnered some level of success in Australia all began by breaking into the institutional superannuation business first. Now they’re setting their sights on investment platforms in an attempt at reaching the large retail market.
Both Martin Currie and BNY Mellon say they are planning to put more work into this area of business.
BNY Mellon recently announced the appointment of Bruce Murphy as managing director of BNY Mellon Asset Management Australia. Murphy, who takes up his post in December, joins from Macquarie Funds Group where he was responsible for the firm’s Australian and global fund distribution for both institutional investors and intermediaries globally.
Mearns, at BNY Mellon, says: “Getting products onto platforms is where Bruce Murphy’s experience with Macquarie, both on the wholesale distribution side and on the institutional side, will be helpful
going forward.”
Experience will definitely come in handy as this part of the market is said to be challenging. Hegarty, at Aberdeen, tells of the firm’s experience in the intermediated market.
“Getting your funds onto platforms can be quite a long procedure.” It is just the beginning of a long chain of command, he says.
“First you’ve got to get your products rated and onto platforms. Then financial planners will access the funds within those platforms. Those financial planners belong to dealer groups and those dealer groups tend to have funds on approved product lists, which will allow the funds to go on the platforms in the first place.”
As Kouryialas says: “You need a good rating, but a rating doesn’t make you successful in Australia. It’s what you do with that rating that matters. You need your products to be part of the model portfolios of those platforms.”
This is key because financial advisors mainly chose the model portfolio from a particular platform. It’s a generalisation but that is where most of the flows go, he says.
But the managers planning on breaking into this part of the Australian market have some tough competition to reckon with. There are around 500-600 funds on these platforms and Davison, of Colonial First State, says: “Foreign managers need to be more than just a core or a core plus global equity manager; they have to be kind of different and sexy, particularly on the platforms where the fees are very toughly negotiated.”
Fee shock
She says that competition on fees is characteristic of the Australian market and could come as a shock to some foreign players.
“Some managers were horrified by the level of aggressiveness of fee negotiations once they won a mandate and started talking about fees. I think there was a bit of a shock that they weren’t able to get the margins for which they had hoped.”
S&P’s O’Connor says: “On more than one occasion I have heard of managers deciding to not go further with a pitch due to the fee issue at the institutional end of the market.”
This would be at the stage when the consultant would have already recommended a manager’s product, he says.
Bingham, at Aviva, says: “In Australia, we haven’t seen the sort of fees attracted in China and India in some 20 years.”
New entrants
Although industry players say foreign asset managers have been a little thinner on the ground following the crisis, O’Shaughnessy, at IFSA, says the association expects around two to five new foreign entrants per year over the next few years.
Kouryialas says: “I agree with IFSA but my question back to them would be, how many of them are going to be successful? If you say four will set up in every year, I reckon out of those four on average only one will be successful.”
If you are one of those four asset managers, you had better take note. When colonists started settling in Australia’s harsh outback in the 1600s, it was a notoriously tough life, and some asset managers might argue that, in this regards, not much has changed.
©2009 Funds Europe
