The Australian investment market is a ‘tough nut’ for overseas investment managers to crack, according to results of research undertaken by the US-based management consultancy Cerulli Associates.
In a report for clients, Cerulli note that the market is more difficult and expensive to establish a presence in than many overseas investment manager initially expect.
Nevertheless, if handled correctly, Oz may hold potential for those willing to make the effort, as many Australian investors are keen to diversify their portfolios.
Cerulli is clear about the potential Australia offers, referring to what it calls Australia’s “massive pool of retirement savings” — the Australian superannuation system.
With assets under management of A$2.05 trn (US$1.49trn) at the end of 2015, Australia’s superannuation (super) funds are among the world’s “largest and most sophisticated pools of organised savings”, the Cerulli report notes.
Some asset managers Cerulli spoke to said that super fund clients can be accessed “relatively cheaply, with minimal risk”. However, others described Australia as a high-risk market, because of commercial pressures.
One asset manager told Cerulli that an on-the-ground presence and good connections between the investment team and clients in Australia are important, particularly for companies that are looking to access retail investors.
Other factors such as operational costs, the difficulty of getting funds approved by “consultants and other key gatekeepers”, were cited as being among the reasons that the market should be considered a risky one.
Regulation a ‘big challenge’
Cerulli added that regulations, which apply to asset managers as well as to financial advisers, are also a challenge.
“One manager noted that, until the last year or so, many advisers were unwilling to use products from new managers because the advisers were contending with a lot of change and uncertainty in relation to the regulatory regime under which they were operating,” Cerulli noted, referring to Australia’s equivalent of the UK’s RDR, a package of new rules known as FoFA (Future of Financial Advice).
“In short, incumbency of existing asset managers is also a barrier to entry for new players.”
Need for right product
The need for a foreign asset manager to have the “right product” in order to enter the Australian market was also cited as vital.
Products need to be ‘best in class’, strongly supported by clients in other parts of the world, and/or highly rated by consultants or relevant to an asset class to which super funds actually allocate money, Cerulli said.
And it noted that one of the biggest hurdles to surpass is being “attractive to gatekeepers” at the organisations to which 70% to 80% of financial advisers are in some way linked to or influenced by.
These organisations, it explained, are the four major banks (Commonwealth Bank, National Australia Bank, Westpac, and ANZ Banking Group), as well as the wealth management group IOOF and a diversified financial services group known as AMP.
So while Australia’s mutual fund industry is arguably “among the most highly developed in the Asian region”, the challenges that foreign asset managers face in trying to penetrate the market are “manifold”, the Cerulli report’s authors said.
“Long-term commitment and deep pockets are needed to ride out a rough initial trajectory.
“However, if foreign asset managers hang in there, opportunities could start to emerge, if and when secular Australian investors decide that they should start to look at offshore investment themes to help to shore up their retirement nest eggs.”