The influx of new foreign fund managers to Australia is a reflection of the maturing of the superannuation funds market. Richard Newell reports
The continued growth in Australia’s pool of investment fund assets has seen an increase in demand for international investments. With such a large and growing pool of assets (current annualised growth of 14%) the fund management industry has a challenge in meeting the increasing demand for investment alternatives. This creates a clear opportunity for global fund managers.
In 2008, a raft of new players will be pitching into the Australian market, while existing asset managers are also looking to gear up their Australian offering. Names as diverse as Investec, Putnam, Nomura, JP Morgan, Wegelin, Northern Trust, Brown Brothers Harriman and Pioneer have all identified Australia as a key new growth area for their international operations.
Richard Borysiewicz, country head for Australia and New Zealand at Crédit Agricole Asset Management in Sydney observes: “It’s getting to be a crowded market. Everyone has identified that there’s a lot of investable assets in Australia, being the fourth largest global asset pool.”
Peter Horn, head of institutional business at JP Morgan Asset Management and the man who will head up the group’s recently announced new Australian venture, says: “By any global standard, Australia is a large and sophisticated investment market. The Superannuation Guarantee introduced 15 years ago has been a catalyst for both rapid growth in assets under management and world-leading product development. For example, Australia’s expertise in asset classes such as infrastructure and real estate is well documented.”
Borysiewicz says Australian institutions are diversifying away from domestic assets for the simple reason that “‘super’ has outgrown the market. The opportunity set for investors has been greatly expanded and with the appetite for more global and non-correlated sources of alpha, there is great scope for global managers currently. The challenge for the investor is to find good managers and products that have not been discovered. The consultants are keen to keep new managers to themselves for as long as possible.”
Commenting on the availability of new ideas in the Australian market, David St John, chief investment officer for Melbourne-based superannuation fund UniSuper, says: “There are some new ideas coming up, but perhaps not as frequently as we would like. Super funds are continuing to grow rapidly and the Australian marketplace, for sectors like infrastructure, is fairly competitive. So funds have to look overseas for new opportunities and diversification benefits.”
Institutional investors are not only looking for new sources of return, but also for ways to manage risk. UniSuper (see HWRM page 21) is one institution that has devised some new risk budgeting solutions. Richard Borysiewicz says that in their approach to clients, Crédit Agricole AM has been successful in getting super funds “to think about risk budgeting at the start of an investment process, and then rigorously track and manage it. Based on our experience in Europe and Asia, we can bring to market some leading-edge thinking in the area of absolute return strategies that can be custom built for clients’ specific needs.”
For those clients who are able to take a more regional - as compared to global - approach, Borysiewicz sees Australian institutions looking to emerging market equities “and then some of the high-growth countries within the MSCI Emerging Markets Index”.
Alex Francois, head of sales and marketing for Principal Global Investors (PGI) in Australia, agrees with this. “There is an increasing trend towards making allocations to emerging markets and in some instances, very specifically Asian equities, there has been greater interest in BRIC economies and their potential growth. A number of larger institutions are looking for country-specific funds such as India or China funds.”
Francois expects allocations to global asset classes will continue to increase both from a diversification perspective, to access sectors not readily accessible locally, and also to reduce the traditional home country bias that has always been evident with Australian investors. The group is planning new products for launch in early 2008. It has already had some success with Australian institutions in the fixed income and property sectors.
Francois says: “Products such as our Global Strategic income fund, Australian Property Securities fund and Global Property securities fund, have drawn on PGI’s global investment research platforms. They are run by local investment professionals in the Australian market, who have been able to manage them for local investor needs. We are about to launch a number of new products covering global emerging markets and global equities that will draw on the global research platforms and will be managed by our global network of analysts and portfolio managers.”
Assets under management by hedge fund managers have increased seven-fold in the past five years to reach A$70.3bn (€41.6bn), making this the largest individual hedge fund market in Asia Pacific. Karyn West, managing director of Apostle Asset Management represents a handful of US alternative asset managers in Australia. She says partnerships such as this enable global fund managers to sidestep the compliance intricacies of gaining a foothold in Australia.
Apostle was recently formed following a buy-out of IXIS Asset Management Australia from global parent Natixis Global Associates. West said the formation of Apostle would build on the growth of IXIS Australia, which now has A$5.7bn under management, over the past seven years.
Three managers will be promoted initially, with others to be brought in during 2008. A US small and mid cap strategy run by Vaughn Nelson out of Houston is the first offering. West says: “They have a good record in the small cap space for the past eight years. We are able to market them in Australia now because there is a high demand for good US managers and limited supply. Ixis had long been promoting the Loomis Sayles US large cap product. They have been one of the most consistent US managers of the last decade. So it was a question of working with them to develop a global growth product. This is something we have been working on with them for past five years. It is something the larger investment teams on the super side will be able to look at, as they have the scale to be able to take a regional approach. The recent performance is outstanding.”
The third manager is Harris Alternatives, a multi-strategy market neutral product. “Their original fund was Cayman Islands fund, which had tax implications for Australian investors,” says West. “We have now set up an Australian domiciled fund.”
Apostle targets super funds and multi-managers. In 2008 it plans to add to its fund range, always with a focus on trying to add something different. “We are not in the business of competing with the mainstream managers. Our approach is to assess which asset classes we should be in and to tackle the more challenging managers that require specialist distributions skills.”
US-based property group AEW Capital Management has also signed a distribution deal with Apostle, in order to tap into the growing demand by Australian institutions for global listed property trusts (LPTs). Through the distribution arrangement, AEW will launch a new fund called Value Investors Asia, in Australia in
Pioneer Investments is another group keen to build stronger ties in Australia. It has just appointed Stephen Teoh to head up sales and consultant relationships in Australia, from a base in Singapore. Angus Stening, CEO for Asia, explains: “Our focus in Australia is very much the institutional segment. We have been there now for five years and originally built the business on the back of a strong hedge fund offering. Now we are seeing success with our long-only strategies.”
JP Morgan Asset Management’s plans for Australia include a range of products for wholesale investors including equity, fixed income, hedge funds and private equity. Through the Hong Kong-based JF Asset Management operation, the firm has a strong regional product range covering China and India funds, and a growing global infrastructure and real estate offering. Until recently, the asset management side of JPM has been represented in Australia by JF Capital Partners, a Melbourne-based joint venture that has been running since 1998. JF Capital Partners, run by founder Michael Fitzsimmons, will continue to operate as an independent boutique fund manager in Australia.
JPM Asset Management has chosen Melbourne as its base, given the city’s status as a fast-growing hub for funds management. Peter Horn says: “This was evidenced by the decision of the Australian Government’s Future Fund to base its operations in Melbourne.”
The Future Fund aims to strengthen the government’s position by making a provision for unfunded Commonwealth superannuation liabilities. Its investment mandate sets an objective of returning between 4.5 and 5.5% above the consumer price index (CPI) over the long term. The target is to offset the government’s unfunded public sector superannuation liabilities of A$140bn by 2020. At the end of November, the fund had over A$61bn of assets. The fund is keeping a fairly low profile while it builds its investment portfolio. Future Fund general manager, Paul Costello has revealed that despite a relatively high early weighting towards international equities, this will not necessarily be indicative of the future investment strategy. Costello says: “It reflects opportunistic buying in the short window of time between commencing investing and the end of the financial year. Australian equities are particularly attractive, as a full credit for company tax on dividends is receivable. This clearly encourages us to overweight our exposure to Australian equities relative to global market capitalisation, but this benefit needs to be balanced against the concentration risk in a relatively small market.
“During 2008 we will focus on diversifying our programme. This will include extending our portfolio of market exposures, introducing active management and exploiting opportunities in private markets.”