Written for Public Mutual Berhad Sept 2008
With slightly more than US$1.19 trillion worth of total net assets of mutual funds at the end of 2007, Australia last year began a concerted push to export its funds management services, not unlike what Ireland and Luxembourg have done.
According to Australia’s Investment and Financial Services Association Limited (IFSA), a national organisation established ten years ago to represent the retail and wholesale funds management, superannuation and life insurance industries, Australia is in an enviable position to achieve this.
Among the country’s advantages, the IFSA states in a 2007 report on The Export Potential of the Australian Funds Management Services, are a large domestic pensions or superannuation industry, a skilled work force, a robust regulatory environment, being in the same time zone as a large Asian market and highly developed financial markets with a stable banking system. In particular, the enormous growth of the middle class in both China and India is expected to boost its case, with funds under management in Asia expected to grow by 14 per cent per year.
As an indication of the spectacular development of managed funds industry in Australia, funds under management by IFSA’s 143 members shot up to about A$1.26 trillion in 2007, up from just A$427 billion ten years ago.
While Australia’s managed funds industry dates back to the period of the Second World War, it was in the 1980s that its investments in unit trusts started to experience tremendous growth, expanding from A$1 billion in 1978 to A$26 billion by 1988, according to data from the Reserve Bank of Australia. The number of licenses issued to companies or individuals providing investment advice, too, grew dramatically in the late 80s, rising from 599 licenses as at end June 1987 to a whopping 25,000 licenses just one year later.
The current Australian government has set its sights on developing the country as a financial hub in the Asia Pacific region. Just as Ireland made aggressive use of its tax regime to develop Dublin as a financial centre for Europe, the Rudd government’s main budget announcement last year focussed on providing tax cuts to foreigners investing in the country. This move is expected to cost A$630 million over the budget period, an amount which the government believes is a prudent investment for Australia’s future as regional financial centre.
The country’s funds management industry came of age in 2006 when its funds under management passed the A$1 trillion mark, equalling the Gross Domestic Product of the entire Australian economy. Thanks to its small population, this translates to about A$50,000 worth of funds under management per person, more than in any other country in the world. Australia today is, thus, very much a shareholder society where most of its workers are indirect investors in the stock market.
A significant part of this is due the contribution of the far-sighted Superannuation Guarantee scheme initiated in 1992 by the previous Keating Labour government. Introduced in anticipation of major demographic shifts in Australia and as part of a major reform package to address the country’s retirement income policies, the scheme makes it compulsory for employers to contribute a proportion of their employees’ salaries – currently nine per cent – into a superannuation fund every three months. Employees, meanwhile, are free to make voluntary contributions into their own funds. There are about 300,000 superannuation funds in operation in Australia today with 362 of these having assets of more than A$50 million.
Prior to the Superannuation Guarantee, there was already a fairly widespread superannuation arrangements that had been in place for several years under industrial awards negotiated by trade union movements between 1986 and 1988. Even back in the 80s, a great majority of the managed funds were handled by superannuation and pension funds.
Data from the Australian Bureau of Statistics (ABS) show that superannuation funds contributed A$798,958 million to the total consolidated assets of managed funds of A$1.319 trillion as at end June 2008. Public unit trusts were the second largest source of funds with A$275,155 million, followed by life insurance offices (includes superannuation funds held and administered by life insurance offices) at A$182, 695 million with all other managed funds making up the difference of A$62,651 million.
The ABS data reflects consolidated assets of the managed funds which means that any cross investment between the different types of funds are eliminated. As an example, investments by superannuation funds in public unit trusts are excluded from the assets of superannuation funds in the consolidated figures.
Superannuation funds are expected to continue to be the biggest contributor to the total funds market in Australia with the total superannuation market expected to reach A$3.2 trillion, without accounting for inflation, in 2022, according to a 2008 report by Rice Warner Actuaries, an Australian actuarial and management consultancy firm. In its Asia-Pacific Pensions 2007: Systems and Market report, Allianz Global Investors predicts that Australia will remain the largest pensions market in Asia until 2015.
While the key driver of growth in Australia’s funds management industry is its compulsory superannuation funds, its other strengths include an increasingly sophisticated investor base, innovative investment products and strong regulatory bodies.
Funds management is estimated to account for about 40 per cent of the contribution that the finance and insurance industry makes to the Australian economy, which puts its share of the GDP at about 3.4 per cent of the value added in the economy. This makes funds management a larger contributor to the economy than industries such as agriculture, utilities and communications.
Australian fund managers are increasingly looking outwards and have been progressively busy buying foreign equities on behalf of local firms and individuals. The proportion of Australian investment abroad as part of portfolio investment has been rising for a couple of decades now, increasing from 15 per cent in 1988 to 38 per cent in 2006.
Fund managers in Australia have also been actively engaged in buying Australian equities on behalf of foreign investors. Foreign investment as part of portfolio investment in Australia, too, has grown. In 1988 portfolio investment accounted for 47 per cent of total foreign investment in the country, a figure that had increased to 62 per cent by last year.
Today, Australia has become one of the major markets in the world for managed funds and the largest market in the Asia Pacific region.