Why managed funds need to set a new standard
In order to bring back the appeal of managed funds, Australia needs to comply with the newly created international standards on managed fund structures, according to Harvey Kalman.
While financial services reform has been a priority over the past few years, little work has been done on the actual investment products themselves to make them more attractive for investors both here and overseas.
Indeed the recently released Parliamentary Joint Committee review of the Trio Capital fiasco has done little to instil confidence in Australian collective investments.
Not so long ago, our collective investments regime was considered to be at the forefront of world standards; however, the lack of continual improvements, particularly in product enhancement and investor protection, has left us behind.
There is now a new global standard in collective investments, the Undertakings for Collective Investment in Transferable Securities (UCITS), developed by the European Commission, which is seen as more attractive than the products now offered to Australian investors.
The paradox is that the Federal Government is devoting a great deal of time, effort and money to improving the view of Australia as a global financial centre.
Recent initiatives include the white paper Australia in the Asian Century and government support of a Centre for International Finance and Regulation.
At the same time, the Australian Securities Exchange (ASX) is seeking to offer a way of improving the tradability of domestic managed funds by launching Aqua II, which will allow fund managers to quote managed funds, exchange-traded funds and other products on the ASX.
Despite all this, the simple fact is that Australia will never be a truly attractive destination for overseas investors as long as our investment funds do not meet what are generally regarded as international standards.
This ‘non-compliance’ means that Australian investment vehicles are off the radar for investors from other countries.
In my view, it is imperative that the managed funds offered in Australia come into line with the Collective Investment Vehicles (CIVs) approach now being used internationally, particularly in Europe.
Such a reform would bring benefits across the board to the financial services industry, as well as the investors they serve.
It would mean more protection for investors, greater investment choice and flexibility, and would broaden the domestic investment pool, adding flexibility.
Recent financial services ministers have all claimed to understand these benefits, and have even gone so far as to promise a review of the system, but so far little has been done.
By mirroring UCITS for domestic investment funds, we could take advantage of the decades of work already put into their development, significantly reducing the work and lead time needed to develop a vehicle that international investors would instantly recognise and be comfortable with.
UCITS have now been adopted by all members of the European Community as the preferred CIV structure. They have already made significant inroads internationally and are well regarded by the global investment community.
The key to their success is that they can produce a new share, or ownership, class within a CIV, which may have a different base currency, or be hedged or unhedged for currency.
This quarantines the effects of the different currencies to that share class and is in addition to other enhanced investor- protection qualities.
CIVs allow domestic investments flexibility in investing in international asset classes and give international investors the same flexibility in investing in Australian assets.
So, for example, depending on where an international investor is based or what their own preferences are, they could invest in an Australian bond fund in either an Australian dollar share class, Euro share class, or Hong Kong dollar share class, and receive performance in their base currency.
Investors in other share classes would not wear the effects of currency movements that are unrelated to their own investments.
It would make Australian funds as easy to use by overseas investors as a European CIV.
As a result, we could expect less Asian investment money to go to Europe and more to be invested into Australian funds, thus creating greater economies of scale, which can be passed onto investors.
With the continued growth anticipated in the Asian region over the coming decades, we need to take steps now to ensure we are in a position to benefit from it, before it also passes us by.
We are already missing out on international investment – despite having what is recognised internationally as a healthy domestic economy.
This is not just because of the recent strength of the Australian dollar, and to blame it on this is just deceiving ourselves.
At the moment, Australian financial services development and improvement is mostly focused on advice and superannuation regulations, with less attention being given to developing better investment fund models.
New models are needed to improve investor protection, maintain our leadership position, meet international standards, and, as a result, attract more investors.
It takes time to bring around the kinds of changes needed, and if we don’t make a move soon we will miss out, particularly on the much-anticipated Asian savings boom.
We need to adapt our investment vehicles so that they align with what is considered international best practice, even if it means introducing “me too” structures that will support Australia’s hoped-for leadership role in financial services in the Asian region.
By doing so, we will strengthen our financial services sector, resulting in more Australian jobs, as well as adding to our own investors’ confidence.
Harvey Kalman is head of EQT corporate fiduciary and financial services at Equity Trustees.
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