Shailendra Singh

The Asia Pacific region continues to be the biggest source of investment into Australian managed funds, according to the second annual Australian Investment Managers Cross-Border Flows Report, released yesterday by the Financial Services Council and The Trust Company.

The FSC-Trust Company report shows that Asia accounts for 66 per cent of all fund flows, followed by Europe (including the United Kingdom) at 24 per cent. Collectively, Europe and Asia account for 90 per cent of all fund flows into Australia.

Since the first study, which began on 1 January 2010 to coincide with the implementation of a new Managed Investment Trust (MIT) regime, investment flows into Australia have increased by 78 per cent from $20.3 billion to $36.2 billion − an average increase of 21.3 per cent per year, compound.

John Brogden, CEO of the FSC said: “The report shows the massive potential export market for Australian financial services”.

The FSC estimates that revenue from the management of overseas funds could inject as much as $700 million into the Australian economy each year.

CEO of The Trust Company, Shailendra Singh said: “Australian funds management expertise is widely recognised across the region. In addition to good levels of inflows into Australia, our managers have invested approximately 24 per cent of these flows in offshore assets.

“We have seen an increased focus in Australia by foreign investors, which has been evidenced in the sale of Port Botany and the Barangaroo project.”

According to Mr Singh, the stability of Australia’s economic and political environment has attracted a large proportion of fund flows from Asia in Australian fixed interest and cash. This asset class comprised 49 per cent all of cross-border investment.

“While interest rates in Australia are at an all time low, they are considered to be a good investment as they are comparatively higher than in Asia,” Mr Singh said.

The report findings also show fund managers are the largest source of inflows at 37.5 per cent, followed by pension funds at 31.6 per cent.

The FSC-Trust Company Australian Investment Managers Cross-Border Flows Report highlights the significant potential of Asia as a source of foreign fund flows. While Asia has 60 per cent of the world’s population, it has 12 per cent of the worldwide FUM market. In comparison, the US has 12 per cent of the world’s population and has 57 per cent of FUM.

Mr Brogden also said: “The proportion of funds sourced from overseas has the potential to increase exponentially if the right policy settings are in place. The finalisation of the Investment Manager Regime and the Johnson Report recommendations will further grow the market potential and capitalise on Australia’s expertise as a fund manager.”

“It is clear the Asia Pacific region holds large, untapped opportunities for the Australian financial services industry, with phenomenal potential for Asia to quickly increase its overall share of funds management activity. Australia needs to ensure it is positioned to capitalise on this.”

“The government has shown its commitment to the region with the signing of intent of agreement for the Asia Region Funds Passport in September. It is time to focus on completing the Johnson Report recommendations as a priority,” he said.

Key findings

• The flow of funds into Australia through MITs increased by 78.3 per cent over three years from $20.3 billion at 1 January 2010 to $36.2 billion at 31 December 2012
• The Asia Pacific region continues to be the most prevalent source of fund flow into Australia with 66 per cent of funds sourced from the region. Europe is the second largest contributor accounting for 24 per cent of total fund flows of which the UK contributed 5.9 per cent
• Australian fixed interest and cash was the largest asset class at 31 December 2012 − 49 per cent of the sample
• Fund managers were the most prevalent investor type at 38 per cent closely followed by pension funds at 32 per cent
• Overseas asset classes accounted for 24 per cent of investments.

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Lin Ngin, Senior Investment Analyst with Lonsec commented, “The distribution of ratings in the 2010 review has a distinct positive skew, due to our focus on reviewing a selective list of high quality offerings, rather than just rating a large number of products.”

Sector themes

Fund flows

Retail fund inflows across the range of funds rated in this sector review have generally been flat. However managers researched by Lonsec have reported greater interest in hedge fund products from institutional clients.

“Although we have seen signs of life in this sector, with US13.7 billion of inflows into the global hedge fund industry in Q1 2010, this is still substantially lower than the US$100+ billion per annum in inflows from 2002 – 2007,” said Ngin.

“An interesting point regarding these inflows is the destination of the money – of the US$13.7 billion inflow, US$15 billion went to larger, established hedge funds managers – this means a number of managers experienced net outflow.”

New products

In last year’s Lonsec review, there were 10 new funds rated – this year, just one.

“Not surprisingly, the dearth of new retail offerings is intertwined with the lack of retail inflows,” observed Ngin.

“This sector is very prone to ‘flavour of the month’ products, whether they be new managed futures products in 2009 (this strategy had a very strong 2008) or commodities based funds.”

Regulation

A major fallout from the global financial crisis has been the policy and regulatory response by government authorities world-wide, particularly in relation to regulating the hedge fund industry.  Many of these regulations remain in the proposal stage and have not been enacted.

“Lonsec is generally supportive of any steps to improve transparency, although some proposed regulations such as remuneration controls, leverage limits and bans on shorting appear to be driven by hostility to the hedge fund industry as a fallout of the financial crisis.

Date: 28 July 2010

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