At least 75 fund managers operating in Australia, either in their own right or through tie-ups, could be described as foreign, according to investment research firm Morningstar. Stuart Fechner, national key account manager at Aviva-owned Navigator, says foreign fund managers are attracted to Australia for a number of reasons. "It's not surprising that the who's who of asset management is all over here. The sheer size of our superannuation sector attracts them. We've got a pretty good underpinning of growth in funds flow compared to many other countries. In many cases, too, the global asset management firms see Australia as a springboard into the Indian and South-East Asian markets, the latter of which is very receptive to Australian examples," Fechner says. Good examples of this trend are Vanguard Investments Australia, which is starting to export its model to South-East Asia on the basis of what it has done in Australia, and ING multi-manager arm OptiMix, which is establishing its model in India.
Watson Wyatt investment consulting practice head Graeme Miller says Australia is a very competitive funds management market. "If it's not an oversupplied market, it's certainly fully supplied in terms of traditional core mandates. Where there is an under-supply, and frankly I think there always will be an under-supply, is in boutique or niche operators that have no unique insights and processes and are running money in a different way to the mainstream core operators. Increasingly, in the institutional space, it's these sorts of managers that will get traction the quickest," Miller says. Morningstar Research editorial and communications manager Phillip Gray says while attractive, the Australian market may not be the lucrative moneyspinner many global asset managers believe it is.
"No matter how big or prominent a brand is overseas, it can't come into Australia, set out its shingle and expect the money to flow in. It doesn't happen that way here," Gray says. "Even if you've got a good performance track record, even if you start advertising, the dynamics of distribution, the dynamics of fund sales are very different to those in Europe and North America. The platforms control the distribution, and the research houses and the dealer group research teams and investment committees control what gets on the recommended list. Even if retail investors were to see an ad and ring their financial planner, in some cases the planner is going to say, 'I'm sorry, I'm not allowed to invest you in that fund because it's not on my recommended list - my dealer group would not allow me to put your money into that fund'.
"That's why there have been casualties: if you don't own distribution capability, you don't have a channel to send product down, and it's pretty difficult. Getting mandates from super funds and getting on investment menus all takes time." Fechner says in this respect, Australia is something of a unique beast. "Other countries have research groups, but the 'keyholder' position of the Lonsecs and S&Ps [Standard and Poor's] . is a bit stronger than it is in other countries. Many of the groups coming in have a brand that is globally better recognised than Colonial First State (CFS) or Perpetual is, but coming into this market they have to jump through the same hoops of having their funds rated, trying to get on to the dealer group approved lists and all of those things," he says.
It is a touch easier if the fund goes down the route of attracting institutional money first, he says. "The time frame is a little shorter too because that gate is kept by the asset consultants, who might know them through other relationships. The Watson Wyatts and Mercers and InTechs and Russells of the world may already be liaising with them in another country or region," he says. Miller agrees that the asset consultants know the managers' capabilities well. "All of our research on fund managers is carried out globally. We don't do any research in Australia on overseas-based managers because we've got people on the ground in the countries where they operate. A global manager that is highly rated by us globally would be strongly supported by Watson Wyatt in Australia if it came here. I mean, that is the business model," he says.
"In retail, a new player coming to Australia for the first time won't be familiar to many of the platform providers, unless they have an affiliation with a global partner. From our perspective, the process of coming to Australia is very simple for a well-regarded manager because we've done all the hard work." Murray Brewer, vice-president and country head for T Rowe Price Global Investment Services in Australia and New Zealand, says a foreign player will "have to go through less hoops" if it wants to operate in the institutional market. "You've got to get the tick from the consultant to get through to that institutional client. Increasingly, that's becoming fragmented - some of the big super funds now have in-house investment teams, and they are not as reliant on the consultant, but having said that, consultants are still absolutely key to that market," Brewer says. In the retail platform market, there are more hoops, he says. "You've got to get your research rating, you've got to get on the platforms, you've got to get the dealer groups to put you on a recommended list, you've got to get into a model portfolio, and you've got teams to meet in an intensely competitive market. You can't rely on that research rating either; you've got to get bottom-up support as well. There's definitely more hoops, but third-party distribution in Australia is potentially a very attractive market if you do it right," he says. Maggie Callinan, manager of the research team for ING's aligned dealer groups - RetireInvest, Tandem, Millennium3 and ING Financial Planning - has some sympathy with the view that the platform market requires new foreign entrants to jump through the hoops, but says that's an "excellent thing".
"It protects our industry. The last thing that researchers want to do is to recommend a fund and have to pull it or put it on hold two years later. We have to make a call on how effective we think an alliance or a tie-up is going to be. We want to give our investors wider access to different philosophies and strategies and expertise, it's good for them, and it's great for an overseas manager to come here and work through that process, because it really works," Callinan says. She says where some overseas managers might "push back" against the Australian research gateways is in the latter's need to see longevity. "Some of them might not understand that it's not only a matter of demonstrating to Australian researchers how beautifully they have gone overseas - what we also need to see is a demonstration of long-term support for BDMs [business development managers] at times when the product probably won't be making money; we want to see a long-term commitment to this market because we don't want a manager that's going to pack up after two years," she says.
Researchers are wary of the experience of Allianz Global Investors and RCM, its global asset manager subsidiary, which was forced to close its Australian share fund in April following the departure of several portfolio managers. The Allianz/RCM debacle is taken as a sign of the competitiveness of the Australian market. If a fund is good enough, it will succeed, Callinan says. "Not every fund is going to be good enough, which may put some noses out of joint. But if we think a fund is good, we will advocate and push it to the platform. Those funds don't come along very often, but they come along. It probably works better for funds that are not mainstream global equities managers, because the market here is very well supplied with that," she says.
"But if it is something that gives Australians access to products in a new asset class - for example, the global tactical asset allocation (TAA) funds - they can get a very good reception, because we need something like that. Examples of this are the Advance Mellon Fund, the Merrill Lynch Global Asset Allocation Fund. These funds are risky but they're a good diversifier in a portfolio, if they're used as a very powerful spice." A lot of overseas funds tie up with institutions first, she says. "There's two ways that they can sell themselves - they can go to the wholesale market or the retail market. Both markets have their difficulties. Going through the asset consultants is probably the easiest way to get volume - particularly in the asset classes where they look overseas, global equities, global fixed-interest and alternatives. The asset consultants will be looking globally for those kinds of funds," she says.
Institutional tie-ups on a wholesale alliance basis - for example, the Colonial First State and Acadian joint venture - is a great way to go, she says. "An overseas manager in the retail space has two choices: it can either fully fund all the distribution support and go down the really hard road of selling on to a master trust - because they're not going to get the funds flow unless they sell on to one of the big wraps or master trusts. So before they even start educating and promoting to advisers, advisers will predominantly always invest through a platform, for the administrative ease, both for themselves and their clients, so the fund needs to get on a platform," she says. It's a chicken-or-the-egg situation, she says. "Researchers might say there's no point in putting you on the recommended list because we can't invest in you. So to circumvent all that and effectively pre-negotiate your positioning on a platform by having an institutional alliance is a really smart way to go," she says. Many routes to the well
"We didn't play hard to get," laughs Chris Clayton, chief executive officer of Acadian Australia Asset Management, reminiscing about the approach the Boston-based investment management firm received from CFS in 2004 to form a joint venture giving CFS the exclusive relationship to sell Acadian's global equities strategy into the Australian retail market. "Our global guys had been looking for investors down here in the institutional space for more than a decade. We started to gain some traction in 2004 when Acadian won an institutional mandate with CFS in the First Choice multi-managers. People from both sides talked about the relationship and shortly after Colonial said it wanted an exclusive relationship."
Acadian loved the idea, but did its due diligence. "From Acadian's point of view, the decision was, 'are we tying ourselves up with people who are experts in retail distribution? Do they bring something to the table or are we just giving up our capability to an ancillary player?' The obvious decision was that CFS was a sensible tie-up in distribution in the retail market," Clayton says. After that, he says, CFS suggested the pair create the Australian equity business, where CFS (which owns half of the business) not only helps Acadian with distribution in the retail market, but provide it with all of the back-office services.
"That was a pretty big incentive for Acadian. We could focus on the things we were good at - investments - and First State would take all of the responsibility for the remainder of the business. We're very married: we're just short of $1 billion of assets under management in the Australian business, but we have only seven staff, of which four are investment people," he says. The key for Acadian, he says, was that it did not need to invest a whole lot of resources in areas where it was not an expert. "We do the institutional distribution and CFS does all the retail. If there's an adviser involved, CFS is responsible," he says. Credit Agricole Asset Management Australia (CAAM) chief executive officer Richard Borysiewicz says speed to market is the essence of approaching a "busy, well-serviced, mature market". CAAM decided to use a third-party Australian responsible entity (RE), Equity Trustees, to cover its foray into the multi-manager market, which kicked off this year with its global fixed interest fund.
"Once we committed to come to market, speed to market was important. We would need our own infrastructure and that would take time. It was very convenient for us to work with Equity Trustees as a responsible entity to come to market and be in a position to work with clients quickly, rather than announce that we're coming to market and then spend the next 12 months building up the infrastructure - the appropriate licensing, staffing, in a tight market such as this, that would take time," Borysiewicz says. Central to CAAM's Australian strategy is that its funds are branded. "The fund is the CAAM Global Bond Fund. Equity Trustees has appointed us as manager, there is complete transparency that it is us. We do the distribution and we manage the money. The RE has the appropriate licensing regime and they have a supervisory role in the eyes of the regulator," Borysiewicz says.
The multi-manager distribution channel was chosen so CAAM could get bang for its buck. "The top five own the lion's share of that business, so I don't need a small army of sales people to do that. They are institutional, they have an investment team, the decision-makers are concentrated, they can - but don't all - have asset consultants, they are institutional entities to us. We're tapping into their distribution: for example, the AMP multi-manager product is distributed by the thousand-plus AMP financial planners," Borysiewicz says.
He says CAAM has had a very good response. "There are probably not enough large global players in the global fixed-income, absolute-return and emerging markets equities spaces in particular, and we'll bring our particular style and philosophy to market. We're a force in emerging markets and Asian equities and you'll see that of us in this market over the next couple of years," he says. "If I could have a wish it would be for a well-diversified business that was 50 per cent in pure institutional separately managed accounts and 50 per cent in multi-managers where the ultimate client is a financial adviser and a retail investor."
United States giant Fidelity stunned the Australian market by launching 10 investment products in a day in 2005, backed by a huge marketing spend, and has built up a Sydney office with a headcount of more than 70. Despite the advertising blitz, Fidelity was not seeking to build a retail presence. Fidelity Australia managing director Michael Ohlsson says the firm has focused on building a strong offering to the institutional and intermediary channels - the brand spending was to "showcase many of our investment capabilities and let the market know what we can do". Ohlsson says Fidelity's 12 equity funds are now available across 24 platforms and the firm continues to have positive discussions with further platform providers. He says Fidelity has received "considerable interest" in its country funds, especially India and China, and Fidelity is "looking at further product innovation which could extend to long/short equity".
