New and improved structures aimed at opening market borders should help pave the way for a more vibrant, sustainable investment management industry in Australia.
Yet while new infrastructure has been built and are ready to facilitate the trading of managed funds across borders, we are yet to see substantial international flows.
New technology-enabled solutions, geared towards delivering improved and safer investor outcomes, are emerging across the supply chain.
Despite this, behavioural, regulatory and legislative obstacles continue to exist, preventing the free flow of managed fund investment across borders.
The fact is that while obstacles to outbound and inbound investing are substantial, the technological infrastructure is already in place for a truly international managed funds market.
Local managers have already successfully attracted around $100 billion from offshore investors, almost double the investment from a decade ago.
This international flow, however, pales in comparison to the total $2.8 trillion fund assets in Australia, and falls desperately short against global peers.
Foreign capital represents 31 per cent of total funds in the United Kingdom, 68.5 per cent in Hong Kong, 80 per cent in Singapore and 99 per cent in Luxembourg.
From an outflow perspective, the size of Australia’s funds management market continues to eclipse Australia’s national GDP, placing greater pressure on domestic capital to seek diversification via offshore investment strategies, sectors and skills.
This requires an efficient market structure that aids, not inhibits, cross border reach and flow.
Australian investors seeking international exposure are limited to certain investment options, in order of accessibility:
- ETFs for hands-off exposure;
- Australian dollar domiciled funds of international strategies;
- Direct international shares through brokers;
- Separately managed accounts that allow international exposure; and
- Offshore based funds in other jurisdictions (often requiring nominal holding companies).
Where ETF exposure can be relatively simple to implement, the more direct and active styles of international investing can be complicated processes for the investor, the fund and the adviser.
Further, the way in which advisers are incentivised and investors are taxed arguably discourages outbound and inbound investing respectively. For instance:
- Appetite among financial advisers to move client capital into more exotic or extra-territorial funds of which they have less understanding is very low (risk/reward payoff not sufficient);
- Limited professional indemnity insurance protection for advisers further reduces appetite to move investors into new territories; and
- All income, derived from domestic or international investments, is subject to Australian tax, at rates comparatively much higher than international peer markets.
The creation of collective investment vehicles, mutual recognition of fund schemes and fund passport arrangements have offered political and practical salves while current regime parameters persist.
The Asia Region Funds Passport is targeted to commence 1 January 2018, enabling managers to offer products to retail investors in participating countries – starting with Australia, New Zealand, South Korea, Japan and Thailand.
This demonstrates a big step in harmonising market access, reinforced by recent reforms to Australia’s Investment Manager Regime, however industry advocates, notably the Financial Services Council, remain vocal about the risk of Australian managers being excluded if Australia’s high non-resident withholding taxes are not reformed or appropriate investment vehicles not created.
The government is currently reviewing withholding taxes levied at foreign investors for income and capital gains from investment trusts in Australia, following industry consultation last year.
We also have much to learn from how undertakings for collective investment in transferable securities (UCITs) have overcome many of the obstacles associated with international funds investing.
We can take heart that the 32 years of learnings, since UCITs were introduced in 1985, have been modelled into the Asia Region Funds Passport, and that the regulatory environment for UCITs is becoming more standardised.
For instance, in November 2016, The Association of the Luxembourg Fund Industry (ALFI) negotiated with ASIC the exemption for UCITs to hold an Australian Financial Services Licence, paving way to a greater range of funds offered by overseas fund managers to Australians.
As yet, we have not seen this development translate to a surge in fund transactions on our network, the reason potentially being driven by other cited market factors.
So, while there is work to be done in the facilitation layer to encourage greater cross-border flow of funds, the pipes are in place to support an active and truly international funds management sector.
Build it and they will come… eventually, with the right amount of regulatory harmonisation.
Sarah Hayward is the head of Calastone Australia and New Zealand.
