Starring role for fund managers

The Investment and Financial ServicesAssociation (IFSA) recently released Policy options to increase Australia’s export of funds management services.

It is an important document that we hope will be favourably considered by our Parliamentarians and regulators, and is essentially IFSA’s 2020 vision of where we believe the Australian financial services industry should be at the end of the next decade.

The options paper outlines measures we can take to bring this vision to fruition and to further develop Australia as a global funds management hub.

The options paper coincides with the April release by the International Monetary Fund (IMF) of Market Developments and Issues, which noted that global cross-border flows have trebled in the past decade and reached a record US$6.4 trillion in 2005.

The report nominated increased cross-border capital flows to ‘push factors’, such as the low interest rates in many mature economies, demographic changes and changes in regulatory and accounting frameworks, along with windfall gains to commodity producers which in turn, have driven a rapid rise in assets under management and a sharp increase in demand for financial instruments.

The IMF report also cited ‘pull factors’, such as robust and diverse growth opportunities and the opening of economies, including financial sectors, to foreign investors.

A major challenge for Australian policy makers over the next decade will be to further the development of sustainable industry and employment opportunities that underpin the economic security and stability of Australia for future generations. It is here that the international trade in goods and services will play an increasingly vital role in the future of the Australian economy.

The Department of Foreign Affairs and Trade estimates that one-fifth of all jobs in Australia are either directly or indirectly linked to exports (this increases to one-quarter in regional and rural Australia).

In the past 10 years, Australia’s export industries have created more than 250,000 jobs and currently provide approximately 20 per cent of Australia’s gross domestic product (GDP).

A service economy

Australia’s economy is now service-based. Axiss Australia data shows that service industries account for 73 per cent of total gross value added, employing about 80 per cent of the workforce (see chart).

In contrast, services make up only 22 per cent of exports, according to data from the Australian Bureauof Statistics (ABS), falling far behind resources such as agriculture and mining.

In comparison, agriculture comprises around 2 per cent of the economy and 17 per cent of exports while mining comprises 5 per cent of the economy and approximately 40 per cent of exports.

As the third largest sector in Australia’s economy, finance and insurance contributes 7.2 per cent or $68 billion of GDP, almost as much as the agriculture, forestry, fishing and mining sectors combined.

To achieve our vision, the time for action to give Australian-based financial services exports the necessary prominence in trade negotiations and in taxation treatment is now.

Australia’s fund managers are recognised globally as being very good at what they do.

The funds management sector is a significant asset to Australia’s economy and is already a significant exporter of its services.

Many of our domestic companies have developed a substantial position in the Asian region and beyond. Witness also the number of new entrants to the market and the recent decision by the Macquarie Bank board to stay headquartered in Australia.

With a high and growing proportion of international income, the bank’s board reportedly thought it was timely to consider their head office location. The ultimate decision to stay based in Australia was apparently based on a number of factors, including, notably, our proximity to Asia.

Australia as a platform to the region

Global financial services companies that have entered this market in the past two decades are very comfortable using Australia as a platform for exporting funds management capability and services into the Asian region.

However, those companies that have already extended their market reach into the region, feel that the rapid rate of investment funds growth in Asia offers Australia more potential than has yet been realised.

In short, there is considerable unmet need and as we all know, wherever there is a vacuum, it will be filled.

Importantly, any costs associated with exploiting these opportunities will be minimal, as much of the requisite infrastructure is already in place.

It is IFSA’s view that Australia’s fund managers are well positioned to meet the growing demand for products, services and expertise coming from the Asian region and beyond, and that this represents a substantial additional export opportunity for the nation.

The politics of exporting financial services

In the marketplace of political ideas, the notion of enhancing export opportunities for financial services is beginning to gather momentum.

In his speech in Singapore on September 17, 2006, Treasurer Peter Costello also highlighted that the flow of international or cross-border capital had trebled between 1995 and 2005, demonstrating the ongoing integration of financial markets.

He remarked that such flows “can be a powerful force for the development and growth of economies. They provide resources, enhance access to technology and management skill, and lower costs by improving competitiveness”.

IFSA believes that cross-border flows will continue to increase at a greater pace over the next decade, as emerging markets such as China and India display a greater appetite for capital and the encouragement of foreign investment opportunities.

This was a theme also picked up by Leader of the Opposition Kevin Rudd, who used last year’s IFSA Conference as a platform to announce that if elected, Labor would establish AFMET, or the Australian Funds Management Export Taskforce to better facilitate trade in financial services.

Rudd noted in his address that: “For too long, export focus has been concentrated on commodities. And for too long, we have been constrained by a national economic vision in which Australia ends up being little more than China’s quarry and Japan’s beach.”

Labor again upped the ante in late May by announcing support for a reduction from 30 per cent to a 15 per cent fixed and final withholding tax rate on distributions from Australian managed funds to non-residents.

Such a move would bring the rate in Australia into alignment with other nations in the Asian region. It also provides certainty and simplicity for foreign investors, be they pension funds, corporates or individuals.

Future investment trends

Diversification and the global shift to defined contribution pension policy will ensure that much of the cross-border flows will be via collective investment schemes or managed investment products.

At the end of 2006, data from the Investment Company Institute in the US and country industry associations, suggested that there was in excess of $1.9 trillion in funds under management within managed investment type products in Asia, excluding Australia.

It is estimated by global research house Cerulli Associates that the growth of the Asian market in this sector will continue at 14 per cent per annum, exceeding that of both Europe and North America.

With many countries within this region in varying stages of development, we are seeing them look to North America, Europe and Australia for leadership, know-how, human resources and support services.

Our industry is considered by leaders in most international financial services markets as one of the most advanced in the world, with a high degree of integrity in both our regulation and operational management.

Australian companies are innovative in fund and product design, for example in infrastructure funding, property trusts, financial planning, investment platforms, hedge funds and retirement savings.

Australia’s retail funds management market has been described by Cerulli as “the most sophisticated retail fund management marketplace outside of the US”.

A recent report by Boston Consulting Group said Australia is home to the world’s fastest growing high-net-worth investor market.

Australia’s managed investment asset pool is the largest in Asia and the fourth largest in the world, as shown by Axiss Australia’s analysis.

Diversification and the search for returns means that Australian fund managers are experienced managers of global portfolios. Chant West’s December 2006 Multi-Manager Survey shows that 38 per cent of our domestic funds are invested offshore.

Australia is politically stable, with a sound and resilient economy. It is often seen to be a safe haven, as well as a sensible strategic investment.

Our workforce is highly skilled and educated, with more people working in the sector than in Hong Kong and Singapore combined.

More than 850,000 Australians speak an Asian language and Australian executives with financial credentials and experience are highly sought after in this region and around the world.

Australia is well positioned, due to experience, expertise, existing infrastructure and geography, to become the funds management hub for the Asian region.

Successfully positioning Australia in this way will deliver significant positive economic benefits, including jobs, to Australia.

We hope that Government and other stakeholders can work productively with IFSA through the remainder of 2007 and beyond to help us realise our 2020 vision.

Richard Gilbert is the chief executive of IFSA. IFSA’s ‘Policy options to increase Australia’s export of funds management services’ is in the ‘What’s Hot’ section of the website at: http://www.ifsa.com.au