A worrying trend for Australian financial markets is more institutional investors gaining exposure to the mining investment boom on overseas equity and commodity exchanges.
The materials and energy sectors constitute 29 per cent of the S&P/ASX 200 Index, so local financial markets can ill-afford for fund managers to gain more resource exposure overseas.
Morningstar's insightful Australian Large Companies Sector Wrap-up, released this week, found more Australian fund managers were investing in the London-listed versions of BHP Billiton and Rio Tinto rather than the Australian Securities Exchange (ASX)-listed versions.
The report found the London-listed Rio shares were about 22 per cent cheaper than the ASX-listed versions on 8 May 2012 and there was a 13 per cent difference for BHP Billiton shares.
The research identified three possible reasons for the widening price discrepancy in the dual-listed diversified miners.
Firstly, the London-listed shares are not entitled to a fully franked dividend, and expectations are growing that the big miners will pay higher dividends as capital costs rise and investment in new mining projects is tempered. Thus, Australian investors who benefit from franking credits are paying a premium for the ASX-listed BHP and Rio shares.
Secondly, BHP Billiton accounts for about 10.8 per cent of the S&P/ASX 200 Accumulation Index compared to 2.8 per cent in London's FSTE 100 Index.
Therefore, benchmark-aware local fund managers and index managers must hold more BHP in portfolios than their peers overseas, which may contribute to a widening price discrepancy for BHP and Rio shares between the ASX and London.
A more likely explanation is currency movements.
Morningstar said: "Mining companies are classic currency plays, and given that the Australian dollar is widely considered a proxy for the phase of the resources cycle, this could indicate the market is pricing in the end of the resources boom and anticipating a weaker Australian dollar."
If so, buying BHP and Rio overseas makes more sense.
Another financial market challenge is encouraging institutional investors to use ASX-listed exchange-traded funds over resource indices and exchange-traded commodities (ETC).
There has been much-needed innovation in this market in recent years, notably from ETF Securities Australia and BetaShares. ETF Securities launched 10 ETCs last month on the ASX, and BetaShares has launched innovative hard and soft commodity and currency ETFs.
These and other issuers have a big job convincing institutional investors to use ASX-listed exchange-traded products. Anecdotally, some fund managers prefer using overseas-listed exchange-traded products that have more liquidity and are less affected by time-zone considerations.
Another threat is the growing attraction of the Hong Kong Stock Exchange for resource company listings.
Fortescue Metals Group's consideration of listing its magnetite assets in Hong Kong is a good example of Australian resource companies seeking closer trading links with China and access to its capital.
Other Australian miners have had difficult experiences listing in Hong Kong and abandoned their initial public offerings (IPO).
But more resource companies listing in Hong Kong is a powerful trend to watch and a reason the ASX needs globally competitive capital-raising rules for small and micro-cap resource companies.
Australia's stalling IPO market is also affecting resource companies.
Resource listings have dominated IPO volumes in recent years, but even better-quality mining floats are struggling to raise capital in this market and gain aftermarket support.
The upshot is that institutional investors may have to look overseas for exposure to larger mining offers.
Perhaps the biggest problems are index weightings and currency movements.
The high weighting of BHP Billiton and Rio Tinto in local indices makes it harder for institutional investors to add value in the resource sector above their benchmark.
And if the Australian dollar is near its peak, local institutional investors might find more value buying resource assets offshore than locally.
It stands to reason institutional investors will increasingly gain exposure to the resource sector using global exchanges, given the internationalisation of the resource sector.
But it would be a shame if Australia's financial markets cannot fully capitalise on a once-in-a-generation mining investment boom.
