Cerulli: Australia summary, global markets

Cerulli: Australia Global Markets

Key points and commentary

KEY POINTS

• The Australian funds management industry continues to be anchored by one of the world’s largest pension sectors. By the end of 2012, total superannuation fund assets stood at A$1.507 trillion.
• Much the largest constituent of this industry is described by regulator APRA as “funds with less than five members” – that is, self-managed super funds in which investors go it alone. These funds account for A$476.2 billion of assets, and there are 499,344 such funds.
• Retail funds are the next largest part of the industry (131 funds with A$398.1 billion in assets), followed by industry funds (56 funds, $294.7 billion), public sector funds (38 funds, A$236.9 billion) and 119 corporate funds (119, $57.8 billion), with a further $44 billion in statutory funds.
• The super fund industry is going to get progressively bigger as the mandatory requirements for employer contributions to super funds, known as the superannuation guarantee, are to increase gradually from the current 9% of salary to 12%. The first phase of the increase, to 9.25%, will happen in July 2013, reaching 12% by July 2019.
• The average allocation of a default strategy super fund in Australia, as of June 2012, was 28% Australian shares, 23% international shares, 9% cash, 9% Australian fixed interest, 8% unlisted property, 5% international fixed interest, 2% listed property and 16% other assets.
• In August 2012, the Superannuation Legislation Amendment (MySuper Core Provisions) Bill passed the House of Representatives, establishing the core framework for MySuper products, a major new initiative for the super fund industry.
• At the time of writing, one final, fourth tranche of legislation around MySuper was still navigating parliament, having been introduced for discussion on November 29. This tranche implements governance elements of the scheme.
• The first major date ahead is July 1 2013, from when these MySuper products, which will be simple and low-fee, may be offered by authorised providers.
• Then, on January 1 2014, it will become mandatory for employers to make employee contributions to a fund offering a MySuper product. This date was delayed three months from a planned October 2013 start.
• Finally, a transition of existing Accrued Default Amounts into an authorised MySuper product must take place by July 1 2017.
• One late amendment to the MySuper bill before it was passed, lobbied for by the Green party, prevented super funds from flipping – moving employees’ funds into higher fee-charging accounts without permission when those employees changed jobs.
• Another late amendment of particular interest to fund managers allows life cycle investment strategies to be incorporated in MySuper products.
• The minutiae of the MySuper environment is gradually becoming clear. In November amendments passed parliament requiring MySuper funds to disclose portfolio holdings on a bi-annual basis online, and that underlying third party asset managers will have to provide the funds with ‘look-through’ capabilities in order to see their portfolio holdings too.
• Meanwhile, formal authorisations are underway, with SunSuper becoming the first to be authorised to offer a MySuper product in February.
• While applications for MySuper are believed to be less numerous than expected, there are signs of products in the spirit of MySuper appearing. For example ANZ’s new Smart Choice product has an investment fee of half a per cent and annual administration of $50.
• In other legislation, in December 2012 the government announced amendments intended to change Australia’s tax framework to support internationalisation of Australia’s funds management industry.
• Also, a program called SuperStream, designed to improve the operational efficiency of superannuation, is taking shape, with various new data standards coming into effect over the next two years to July 2015.
• Outside of the super industry, one notable trend has been the growth in exchange-traded funds, from A$1.1 billion in AUM in 2008 to A$6.4 billion in 2012, with 25 new product launches in the last of those years.
• New ETF products are showing a more subjective bent, such as a UBS product whose underlying index is based on stocks upon which UBS analysts have a ‘buy’ recommendation.

 COMMENTARY AND PROGNOSIS

Australia is approaching one of the most significant shifts to its pension fund environment in decades. On July 1, a new type of product called MySuper will begin to replace default investment options in superannuation funds; from January 1 2014, it will be mandatory for employers to make employee contributions to a fund offering a MySuper product.

It is still becoming clear just what difference this will make in practice. The whole point of the MySuper initiative is cost and simplicity: default funds must have a low fee (around 1% or less) and must have a single, diversified investment strategy. In one concession amendment made as the bill passed through parliament, this single strategy can be a life cycle approach, within which the investment option mix changes according to the age of the member, but that’s about as complex and tailored as it’s going to get. It’s also clear that there will be a heavy emphasis on governance: trustees will have to articulate a target 10-year rate of return and level of risk. Also, MySuper products must provide death and TPD benefits.

What will MySuper funds look like? In order to be low-cost, there will clearly be an emphasis on passive investment, with a little alpha secured from active strategies around the edges. In practice, many people think that this means most MySuper options are going to look pretty much the same, and that long-standing distinctions between industry super funds and retail master trusts will be eroded. However, a lot of effort is being put in to the development of alternative methods of securing beta, with groups such as UBS and Ibbotson developing ostensibly passive products based on a subjective benchmark, such as broker recommendations (in UBS’s case) or weightings based not on market capitalisation but value (in Ibbotson’s case). The hope is that funds can still gain a performance edge through these products without having to spend a lot on fees or turnover of holdings.

Several fund launches give us a clue as to what the industry will look like, notably ANZ’s Smart Choice – actually launched before MySuper products could be submitted for authorisation, but clearly set up with that in mind – which has an investment fee of just 0.5%. In some cases funds won’t look much different to existing default options: MediaSuper, an industry fund, submitted its existing default product to be authorised under MySuper, and was successful. Indeed, industry funds have been among the fastest to announce their authorisation; SunSuper was first, in February, and others to have been authorised since include Cbus, another industry fund, and Combined Super. We are also likely to see life cycle funds grow in popularity as a consequence of MySuper, with BT already gaining traction with its life cycle-styled Lifestage Funds series.

It should be said that MySuper does not mean the end of more actively-managed products, and therefore for managers seeking allocations from super funds; those products will still be perfectly legal, but investors must make the effort to select them and to move out of default options. Marketing will therefore be crucial.

While MySuper has dominated headlines, other interesting changes are underway. It has long been argued that Australia, home to such an enormous asset management industry (now more than A$1.5 trillion for super funds alone), ought to have a more international role, particularly for Asia Pacific. A new program called the Investment Manager Regime, launched in June 2012, aims to make it easier for offshore investors to use Australian fund managers, and amendments were announced in December to clarify the associated tax framework. In particular, these amendments may make feeder fund structures more practical.

The self-managed super fund lobby continues to gain power and traction in Australia, making these funds – made up of people going it alone with their retirement savings, under some strict regulatory conditions – by far the biggest component of the Australian superannuation sector. This continues to concern regulators worrying that investors do not always know what is in their own best interests, but the increasingly onerous compliance requirements APRA puts upon self-managed investors do not seem to be deterring them.

ETFs, having been barely used in Australia until 2008, are gaining steady traction and accounted for A$6.4 billion in assets by the end of 2012, with 25 new fund launches that year. Their growing popularity is linked to the changes in the financial planning industry over that period, during which the commission model – which gives planners no incentive to put investors into ETFs – has been steadily replaced by fee for service.