Big enough to be a continent on its own, with its arid outback, surf beaches and obscure wildlife, Australia bears little resemblance to its Asian-Pacific neighbours, and its financial services industry is no exception to this. In fact, on all counts, this country can hardly be compared to anywhere else on earth.
Dominated by huge superannuation pension funds, the asset management market has taken a completely separate path to any of its peers, creating a unique set of servicing requirements on the way.
Madeleine Senior, newly appointed head of Australia and New Zealand for Northern Trust specifies: “Asia can be characterised by large sovereign asset pools – pension funds are largely administered by the state.”
“In Australia, pension funds are very much administered by corporate structures. Super funds are largely unitised structures and they support various investment options for their members. Fund administration components are more relevant here.”
Over the last 12 months, Australia has seen a significant influx of capital from the rest of the region, particularly from China. Stephen McNabb, Australian head of research for real estate asset servicing specialists CBRE, points out that offshore investment from China has seen an increase due to relaxation of regulation, particularly that surrounding real estate. Of Chinese investment in real estate, Australia has snapped up a 15 percent share of the capital.
At the same time, according to McNabb, “cooling measures” in China have created an unstable economical outlook, and more risk in the domestic real estate market.
“Regulatory liberalisation has allowed institutions such as life insurers to invest offshore and into real estate,” he says. “Australia provides a good diversification opportunity with lower risk due to the sound residential fundamentals, particularly in Sydney.”
David Knights, chair of the Australian Custodial Services Association (ACSA) adds to this, pointing out that its relatively easy for foreign investors to access the Australian market, while low sovereign risk goes hand in hand with optimistic projected growth and favourable exchange rates.
He says: “Assets managed by the top 25 alternative asset managers in Australia have grown to more than 338 billion AUD ($249.1 billion). These assets include real estate, infrastructure and liquid alternatives such as hedge funds. We should see continued growth in alternative assets due to the growth of fund inflows.”
The capital coming in is not necessarily a brand new development, but there has been a shift in the trend and, more specifically, the origins of the investment.
McNabb points out: “Australian commercial real estate has attracted rising investment from offshore since 2008. Prior to 2012 around two thirds of this capital was from the US and Europe with one third from Asia, while since 2013 this has turned, with two thirds of capital from Asia.”
According to Knights, there has also been a significant increase in the custody and administration sector; at the end of 2014, the industry had a collective total of 2.5 trillion AUD ($1.8 trillion) in assets under custody. Partially, he attributes this to natural growth in the market, however he also suggests that it’s down to Australia’s unique superannuation sector.
Under a compulsory retirement saving scheme, citizens must pay 9.5 percent of their wages in to an approved investment fund – leading to huge funds with immense investment potential. It’s the fourth largest pension fund market in the world and the sixth largest from an asset management perspective. Senior believes it’s also a key driver of the Australian asset servicing industry.
“The taxation and accounting regime for super funds is complex, and we’ve built a solution for that,” she says.
“Growth and complexity means that a number of super funds turn to service providers to help them with their operating models. There are cost pressures, and funds need to be vigilant and review their providers regularly in order to secure a fair price for a fair service and get the best technology available to meet investment duties to pension fund clients, the underlying clients and the regulator.”
“It could be help with matching trades in the market, or offering private equity monitoring and liquidity management, or purely carbon footprint monitoring and reporting, or regulatory requirements.”
It’s an already competitive sector, with the enormous funds holding all of the power. And they’re only going to get bigger, and more powerful.
In 2010, the Cooper Superannuation system review noted that in 1996 the superannuation pool was equivalent to 47 percent of GDP, while in 2009 this had increased to 90 percent of GDP. It predicted that by 2035, the pool would be at 130 percent of GDP.
Knights says: “ACSA anticipates continued growth in the sector, as attractive tax rules encourage voluntary superannuation saving in addition to the compulsory contributions.”
Senior goes in to more detail, saying: “Super savings structures are moving more and more towards pension funds and so we’re seeing that contributions are increased. As they’re increased and these pools grow, the asset managers for the super funds are looking at how to diversify their asset allocation in order to gain alpha.”
“There’s very much a liability-driven investment approach in the market here, in order to meet those future liabilities as the baby boomer generation retires.”
Australia’s business appears to be flourishing in-house, but such wealth has inevitably led to large funds looking abroad for greater opportunities. As Senior points out, Australian super funds and pension funds tend to have a large proportion of their asset exposure to the Australian market – often as much as 50 percent. However, there has been an increase in institutions setting their sights across borders – and they’re not reciprocating to the Asian markets.
Knights points out the current level of assets under custody, 2.5 trillion AUD ($1.8 trillion), represents 154 percent of the entire market value of the Australian Securities Exchange – circa 1.6 trillion AUD ($1.1 trillion).
“This is driving continued pressure for our clients to seek either alternative asset classes of foreign investment opportunities in global and emerging markets,” says Knights.
“We would logically see a continued focus by our clients to seek investment offshore.”
Senior also suggests that with the complexities and liabilities attached to super fund administration – tax reporting, transparency requirements, data processing and risk mitigation – managers are looking for alternatives to increase their returns.
She says: “As institutions are looking to manage those liabilities, offset a low interest-rate environment and create diversification in their portfolio, we are seeing more investment in Europe, where there are opportunities around things like property, and Vietnam, Thailand and Malaysia for funds. As there are no UCITS structures per se in Australia, to gain global exposure the favoured route is via Ireland, as opposed to a complement segregated approach.”
Nevertheless, the Australian asset management firms have evolved, and continue to do so, to meet the challenge laid down by these mega-funds – addressing everything from regulatory obligation to ethical considerations.
According to Knights, the Australian Prudential Regulation Authority (APRA) recently introduced requirements for super funds to provide detailed look-through data on their investment structures to underlying investments, both listed and unlisted.
At the same time, the APRA SPS 530 requirement on investment governance requires funds to regularly stress test their portfolios to asses their resilience in times of crisis, and APRA has also issued guidelines for asset servicing clients to regularly review their choice of providers.
Knights says: “Australian asset managers are increasingly growing in sophistication in the management of their investments. This is driven by competition in the sector, along with increasing Australian regulatory compliance.”
Australian clients are a special breed, requiring particular services – and they have the prerogative to pick and choose those that can provide the correct product. According to Senior, they also have a tendency to look for the most responsible route to investment.
She says: “As those fund managers have become more sophisticated and complex – to reflect the way their clients have become sophisticated and complex – so they require more from the asset servicer.”
“Many Asian sovereign wealth funds have signed up to the UN principles for responsible investing, so we have developed things like carbon footprint monitoring tools and private equity monitoring tools.”
According to Senior, firms should strive to provide specially tailored services for particular funds, and, while efficiency and effective governance of portfolios is still fundamentally important, it’s flexibility and adaptability that will keep an asset manager relevant. And a large part of this is a transparent approach to investing.
“In the Asia-Pacific region, we end up with a diversity of clients, generally very large pools of assets and clients who are sophisticated in their behaviour – ensuring they’re responsible in the way in which they invest.”
She concludes: “It means asset managers have to be multifaceted. Custody just doesn’t describe the functions that we undertake anymore.”