United States funds management companies have found coming to Australia a rockier road than they anticipated.
The challenges, including building a good reputation and explaining investment concepts that are unfamiliar to Australians but common in the US, have been hard to overcome.
Ultimately, a US fund manager's reputation and hence funds under management (FUM) can only be boosted with time, according to Financial Media Connections director Christine Harris.
"Getting the US parent to understand the Australian market is important," Harris says.
"Most of the Australian media will be focused on stories that are directly impacting the Australian market and Australian investors.
"If it doesn't have an Australian angle or an Australian perspective, it can be difficult, regardless if the company passes a milestone in terms of FUM."
She says it is critical for US fund managers to build their distribution network, and leveraging off an established Australian partner for that purpose is an effective way of doing so.
"The fund manager may have a global view, but because they are not investing in the Australian market it's hard to get the media interest," she says.
"Having a successful press campaign isn't always the same thing as successful business development campaigns."
So far, many US fund managers have achieved a good footing in Australia and are starting to see an appreciation of their skills and solid FUM gains from the world's fourth-largest pension market.
Building reputation
"The way we entered the market is with a single product focus," T Rowe Price Australia and New Zealand director Murray Brewer says.
The firm only distributed its high-conviction, bottom-up Global Equity Fund (GEF) to clients and financial planners over the past four years.
T Rowe Price chose to set up operations in Australia, Japan and Europe in 2001.
The company got its first mandate from Victorian Funds Management Corporation (VFMC) by using a strong third-party distributor in 2004.
"This was our first client and then we built our reputation out from there," Brewer says.
It was initially hard to pierce the Australian market as T Rowe Price had to repair damage to its reputation caused by the press during the great NASDAQ tech bubble that began in 1995, he says.
The Wall Street Journal ran an article that wilted the Baltimore, Maryland-headquartered company's standing because it did badly against its peers as it under-invested in tech companies.
T Rowe Price's fund managers did not believe the fundamentals matched the irrationally exuberant share price rises at the time and contrary to other managers, started selling off tech stocks before the crash.
The article said the "gears of the investing machine that helped make T Rowe Price one of the nation's 10 biggest mutual-fund firms have gotten stuck".
Investors subsequently siphoned money out of T Rowe Price and gave it to other fund managers, including one of the company's main rivals, Legg Mason, whose headquarters are opposite T Rowe Price's.
"But when the tech bubble all came undone, we looked very good," Brewer says.
The NASDAQ stock market reached a peak of 5132 points on March 10, 2000. Two years later it bottomed out at 1108 points, a near 80 per cent decline.
However, some of the negative sentiment prompted by the press remained.
From late 2002, the US funds management community jumped back into T Rowe Price at the speed of over $1 billion in inflows a month.
Demanding alpha
T Rowe Price manages $414 billion for investors globally. In Australia, it looks after $3.5 billion for investors with 36 major clients as well as substantial platform inflows.
It has been focusing on distributing more of its Asia ex-Japan strategy after the GEF forged a good standing.
But Brewer says there has been a steady shift in what people are looking for in a portfolio.
"Not that long ago people were happy with the 200 basis points global equity product," he says.
The Australian market is "demanding alpha" as high as 4 per cent, he says, which has made T Rowe Price step up its investment style.
"Our approach is all-market, all-cap, we go right down from mega-cap to small-cap companies. We believe the larger end of the market is very efficient and difficult to get an angle on and get the return profile we want," he says.
He says T Rowe Price will introduce its US retail strategies to planners slowly and only if there is strong local demand for it.
"We are purely a fundamental, long-only shop. We don't build tricky products, we don't leverage, we don't short," he says.
Very savvy
It was an easier road for Putnam Investments to establish a good standing in Australia.
Putnam began its local business in the mid-1990s as a sub-adviser to Macquarie Group and then managed Rothschild Investments' global equities portfolio.
Rothschild was bought by Westpac in 2002, the lender now vying to become Australia's biggest bank by market value by acquiring St George Bank.
Putnam, with its global headquarters in Boston, Massachusetts, decided to venture into the Australian marketplace solo in 2006. Its initial offers were a concentrated version of its Global Equity Fund and Worldwide Income Fund.
The company has nearly $1.5 billion in funds under management from Australian investors now, compared to nothing two years ago, Putnam senior vice president Peter Walsh says.
"Australia is one of the most sophisticated markets in the world. The clients are very, very savvy and willing to try new investment approaches and that matches well with what we do as we have quite a sophisticated platform of offerings," Walsh says.
The company has had no trouble getting mandates from clients because of its ability to tailor portfolios for institutions and it is renowned specifically for global equity and fixed-income management.
The firm's products have been rolled out on platforms of wealth management firms including Westpac-owned BT, AMP, Axa and IOOF.
In the March quarter, Putnam was one of only six managers in the country to record gains in its total assets under management, Morningstar data shows.
Key growth areas
Walsh says Putnam has a long road ahead as snaring inflows and mandates in the Australian market is fiercely competitive because many fund managers are vying to manage superannuation money and adviser inflows.
"Australia, and Asia for that matter, are both seen as the key growth areas for the parent," he says.
"The US is a very mature business, and obviously within the US itself Putnam is a very mature business.
"We have quite a broad platform of products we can choose to offer in this market, but we want to make sure that we are bringing our best products to suit this market."
He says clients choose Putnam because it can create highly-tailored portfolios and generate alpha over any index, such as the interbank benchmark Libor or an equity index like the S&P/ASX 200.
"Increasingly, we work with a lot of large and sophisticated investors and that gives us an insight into the way they think," he says.
"They are dissecting every element of the investment process and the great thing about working with those sorts of investors around the world."
Putnam is considering launching more funds in early 2009, he says.
Good opportunity
Funds management giant Vanguard Group grew quickly in Australia with its simple message that index funds will end up outperforming most active fund managers.
Since its establishment in Australia in 1996, Vanguard has attracted $70 billion in funds under management for its indexed funds from local investors.
However, the company still has a lot of ground to cover in convincing the Australian investment community about the benefits of indexing, according to the founder and managing director of Vanguard's local operations, Jeremy Duffield.
Duffield had been working at Vanguard, headquartered in Valley Forge, Pennsylvania, for 16 years and wanted to settle back in Australia in the 1990s.
"I was in charge of planning and development and a number of things and wanted to work on taking Vanguard international and come home to Australia," Duffield says.
"I thought there was a good opportunity in Australia to create our first international business, so it was a good mix of my desire to come home and create a good business opportunity.
"We are very happy with how the Australian business has [so far] performed.
"But a lot of financial advisers are not aware of what indexing is all about."
According to Duffield, around 14 per cent of the Australian market use indexed funds, compared to 5 per cent a decade ago.
"We are holding hundreds of workshops with financial planners," he says.
"We think we have most of the major assets and most areas that financial advisers want index covered so we are mostly putting the message about what we have already got."
Vanguard also has to fend off competition from United Kingdom giant Barclays and US manager State Street for index tracking products, he says.
"ETFs [exchange-traded funds] will grow in Australia. But it's just a way to buy [an indexed product]," he says.
"It depends on a number of factors like what is best for you. Both have their role I think.
"We are not saying index funds should be 100 per cent of your portfolio, but understand how to use index funds along with the other components of your portfolio, which are probably other traditional active funds and direct stocks."
Local heritage
BlackRock chief executive Maurice O'Shannassy feels ultimate success will come from having a long, local standing in the investment community.
O'Shannassy has been at BlackRock since the late 1980s, but there were several different incarnations of the firm.
It was first known in 1983 as Potter Partners Asset Management and in 1987 as Potter Warburg Asset Management. In the mid-1990s the firm became Mercury Asset Management and eventually became a part of the investment arm of securities firm Merrill Lynch.
In 2006, Merrill Lynch merged its investment arm with fund manager BlackRock, and the name of what started as Potter Partners Asset Management became BlackRock.
"In many ways this was a local company that became global," O'Shannassy says.
"We are up at $21 billion under management in Australia, which is up from 10 years ago at $2 billion."
But he says the firm has still had a lot of trouble building its reputation among financial advisers and the local investment community because BlackRock has underperformed in the past.
Over time the fund has understood and met the Australian investment community's needs and having enhanced investment systems from a global parent has helped, he says.
"I think it helps having that local heritage that you are responsive to the needs of Australia and when things are not going so well, you are able to set yourself right to fix it," he says.
"That has come as a result of a lot of experience and a willingness that if something is not working as well as you like, make the appropriate adjustments."
He says currently financial advisers and investors want to invest with a manager that can clamp down on risk, which is where being part of BlackRock has helped.
"BlackRock has, what we like to think, some of the most sophisticated risk systems in the world," he says.
"And so that focus on risk, how to avoid risk, how to understand it is important."
When BlackRock fund managers pick securities, they consult their counterparts in offices worldwide.
Currently, Australians are demanding higher allocation to international equities, O'Shannassy says.
"Australians will typically invest more offshore because Australia as a market cap is only a small part of the world, so our investment clients will have a higher allocation to offshore investments than say a local US investor might," he says.
"That creates quite specific needs in a different way. But at the end of the day, investors are after diversifying their risk and good returns."
