Fund managers get offshore warning

As the current rate of superannuation inflows force Australian investors to look at investing in offshore listed stocks, fund managers should be wary of responding by flooding the market with a proliferation of products, a leading fund management group said.

Perpetual Investments chief investment officer Emilio Gonzales said as superannuation inflows force Australian investors to invest more funds into global capital markets, there is a danger that fund managers will respond with product offerings with the sole purpose of capturing the trend.

“A healthy flow of funds requires a home, and there will be no shortage of products coming onto the market to try and capture this flow,” Gonzales told yesterday’s Finsia superannuation seminar.

“The danger with this is that average products get a look in and attract funds where ordinarily they would not. [Mitigating this] is the high level of competition between super funds to generate competitive returns, as they themselves are in the business of attracting members, and investment performance is pivotal to this,” he said.

Gonzales said to combat such a move asset consultants, trustees and research houses needed to keep the “bar high” and conduct their due diligence in a market that will attract every possible investment idea that comes along.

“Fund managers will respond with new offerings such as hedge funds, absolute return funds, infrastructure and private equity. This is a positive development in that superannuation funds will be seeking new sources of alpha and greater diversity in their portfolios as funds grow, provided it does not create return slippage.

“Fund managers will also face increased competition from quarters that previously were not considered a threat. For example, investment banks that traditionally relied on transaction-based volume to generate revenue are finding that their skills in structuring and innovation can also be applied to funds management.”

He said as share prices rise, new assets may also list on the Australian Stock Exchange (ASX): “These may not just be from Australian companies, but may include foreign companies or investment companies listing on the ASX where excess local capital can be invested in global securities.”

Gonzales said in order to keep pace with this emerging trend, Perpetual changed its approach in March 2006 by expanding its investment universe and allowing Australian share funds to invest in overseas listed stocks, but only if those stocks represented a superior investment option than its Australian-listed peer.

“This was a significant development in our investment approach and it is inevitable that our market competitors consider this when they realise the impact of the weight of money flow argument. Not only will their clients increase their offshore allocations, but their own desire to generate returns will also make it clearer as to the most efficient way to allocate clients’ monies.”