A year is a long time in investment

A year is a long time in funds management — and even some of our investment experts were surprised by the way markets, asset classes and investment vehicles gained or waned in popularity during the course of 2004.

Australian equities were picked by almost all our pundits as an asset class which would be most favoured by the market during the year, and if anything, this sector was much stronger than expected.

AMP Capital Investors chief economist and head of strategy Dr Shane Oliver was pleased with this prediction, commenting that it certainly did well in terms of funds flows.

While domestic equities were a “definite winner” according to Macquarie Funds Management head of retail Bruce Murphy, international equities, which were also tipped to gain popularity again, did not fare so well.

“Global uncertainty and currency moves stalled the global equity party I had envisaged. International shares were good at the beginning of the year but softened,” Oliver says, while Murphy comments “property did very well throughout 2003, and Oliver predicted that unlisted non-residential property would be the darling of the market this year — and while it did continue to take money, listed property was also favoured as well as unlisted.”

In terms of vehicles gaining favour, hedge funds and particularly hedged international investments were predicted to be in hot demand by the end of 2004.

Bridges Financial Services head of research and technical Justin McLaughlin says’ “Hedge funds have seen increased adoption by institutions, but retail is still slow on the take up. Most public funds-of-hedge-funds in Australia have earned 8 per cent, which is respectable.

Another fad that took hold early in the year but which seemed to run out of steam after the first rush was the emergence of listed investment companies (LICs). Predicted as the ‘next big thing’ by Murphy and Brillient! director Graham Rich, they certainly came through with the goods early on. However, by mid-year, market saturation saw demand dry up. The launch of some LICs, such as that of Private Portfolio Managers (PPM), were put on hold, and others such as the Pengana Managers offering just scraped over the line.

But in the product arena, no one predicted that income and protected vehicles would find a niche in 2004.

“It was a surprise that that has continued given the strength in markets,” Oliver says.

“I should have called income products, as these are in big demand. The market is getting more focused on after-tax returns so those income products with a tax-effective focus — that is, via hybrids, property and imputation share allocations — will attract strong interest going forward,” Murphy says.

When it came to products and vehicles experiencing outflows, there was a wide range of opinions. Oliver’s prediction, international bonds, are “certainly not in favour”, McLaughlin’s pick of unhedged international equities have indeed seen outflows, and Murphy says traditional single manager diversified funds “continue to be under pressure”.

Rich picked single label retail funds as the vehicle that would suffer at the hands of platforms and multi-sector single manager products — and with Credit Suisse Asset Management’s Brian Thomas asserting earlier in the year that “retail is dead” because of the popularity of platforms he was right on the money.

Whether the funds management industry expanded or contracted during 2004 to some extent depended on the return of consumer confidence, which was hanging on a knife edge after the rough ride many investors had experienced during the bear market.

And things on this front were certainly looking up over the year.

“The market has given industry funds under management a boost and people are more prepared to invest than for some time. We should see continued solid growth,” Murphy says.

McLaughlin adds: “Funds under management have held up better than we expected because of stronger than anticipated Australian shares and continuing investor support for a weakening US equity market.”

As for how much the market contributed to funds under management growth, Oliver does some calculations.

“Using super funds as a proxy for the market, if you look at the InTech diversified fund median return, which was 10.9 per cent, the market returns were easily 10 per cent.

“So returns on investment income would have grown funds under management by 10 per cent alone, and with steady flows through the superannuation guarantee and the pick-up in retail funds management, we should easily be between 11 and 20 per cent, as funds haven’t been going out the door.”

Oliver also comments that the big fund flows into housing and residential property of 2003 have slowed right down, with the sector going out of favour, effectively freeing up additional investment funds.

Meanwhile on the platform front, our experts made their predictions early in the year in the midst of a wave of new generation platform launches.

While some predicted contraction of the market to varying degrees, others thought the number would remain static, but some of those providers still out there would suffer from outflows and a lack of scale.

Murphy was one who predicted that the number of platforms would remain reasonably stable, however, expressed his concern that some new entrants this year are employing organic strategies in “such a scale game”.

IOOF general manager retail funds management Jarrod Brown also comments: “We believe the industry has underestimated the level of inherent inertia in regard to consolidation. While we are seeing an increased number of acquisition opportunities, completing these transactions with efficiency is extremely challenging for all industry participants.

“While consolidation continues, its pace is restricted by underlying complexity and the lack of real certainty that can be measured in regard to potential value of many of the available opportunities.”

Estimates of what percentage of retail fund inflows platforms would account for by the end of the year were in the range of 75 per cent to 90 per cent at the beginning of the year.

Murphy says: “It is probably less than the 90 per cent I anticipated, due to strong growth in closed end structural retail offers which are not platform friendly.”

And of these inflows, the percentage going to low-cost platforms was harder to call, with responses varying from 10 per cent to 40 per cent. Since the predictions were made, the landscape has changed somewhat, with AXA, Credit Suisse and Asgard introducing new offerings into the low-cost space, and more established platforms gathering momentum.

Murphy, who predicted 30 per cent of inflows would go to low-cost platforms, says that while it is difficult to get good data in this area, his pick was “probably a bit bullish” but not far off the mark.

Brown says that while predictions regarding industry consolidation and flows were reasonably accurate, a new and important trend has occurred in the platform arena.

“The level of ‘end to end’ integration is the key trend to monitor. The repackaging of dealer, dealer services, platform and asset management fees in an integrated manner is becoming more prevalent. Participation at different, if not all points of the value chain is becoming more important in regard to competitive positioning, unless asset management performance is exceptional,” Brown says.

“Commoditisation has naturally led prices downward and the impact on flows has been obvious. Equally as important, differentiation will continue to provide margin.”

— Freya Purnell