Alternative investments: foreign investment rule changes

The repeal of the Foreign Investment Fund rules (FIF) should have a significant impact on the alternatives space in the coming months.

FIF, which was repealed in July 2010, required any overseas fund manager selling an investment to advisers to have a local trust set up to manage the tax treatment of those investments being offered in Australia.

The impact of FIF was to stymie the introduction of quality overseas alternative products by burdening any joint venture with the overhead costs of a local trust structure.

During the 2009-2010 budget, the current government proposed to replace FIF with a specific anti-avoidance rule, the Foreign Accumulation Fund (FAF) rules.

The intentions of the new provisions will apply where an investor holds an interest in a foreign accumulation fund, and entered into the fund with the intention of receiving a tax deferral benefit.

While FIF hasn’t yet been finalised, it is expected to significantly reduce the compliance and administrative burden placed on Australian investors.

The repeal of FIF is a critical turning point for Australian investors looking for access to quality products, according to Credit Suisse head of third party distribution Josh Peel.

“If you look at what has been available to Australian investors, it has been somewhat sub-optimal fund structures, if I can say it that way,” Peel says.

Once the new FAF rules are implemented, there will be an explosion of competition from overseas fund managers, leading to an even more competitive investment market, he adds.

However, the introduction of FAF will only be beneficial for fund managers who are finding it difficult to offer overseas products directly to Australian investors. For investment companies here who are already exposed to global fund managers – such as AMP Capital – FAF will make little difference.

“In my world … less than 5 per cent of our exposure [in private equity, for example] is to Australia because of how we’ve structured our program. We are accessing, globally, managers and deals, so from my perspective of what’s specifically offered in Australia. I don’t really focus on that because it’s not really a constraint,” says head of alternatives at AMP Capital, Suzanne Tavill.

Some of the other illiquid alternatives exposure in AMP Capital’s alternatives asset allocation are only slightly higher towards Australia, Tavill says.

Despite the exposure towards global fund managers among some companies, overall retail investment towards alternatives is very low. The introduction of new, quality products as FAF is implemented may go some way towards boosting the size of asset allocations.

Currently, investors allocate roughly 3 to 5 per cent of their portfolio to alternative assets. The small size makes it difficult for the alternative funds managers to hold the attention of advisers for long.

In contrast, overseas investors have roughly 30 per cent of their assets in alternatives. While that large allocation may have something to do with the precarious state of the share market and the generally gloomy nature of overseas investors, it is a good indication of the work fund managers have to do here to close the gap.