Quan Nguyen, head of equities at Zenith Investment Partners, said the growing demand for responsible investment, exchange-traded products, international small and mid-capitalisation products, and currency-hedged products has driven this growth.
According to Mr Nguyen, responsible investment (RI) and environmental, social and governance (ESG) have been the most significant contributors to growth in the global equities peer group since 2018.
“Investor demand for products that align with their values has driven a multitude of new products in the space,” he said.
“The growth has been swift, with the number of offerings increasing almost seven-fold since 2018. Whilst there has been significant growth in this segment, we note that the underlying approaches to RI and consideration of ESG issues are diverse, with an array of offerings available for investors with varying levels of intensity.
“We expect this market segment to be an area of continued growth and evolution.”
Listed products, Mr Nguyen said, were the second largest contributor to growth in the international shares sector, with the rapid rise of exchange-traded funds (ETFs) as a key driver. He added that the rise of structures has been important to the growth of listed offerings over the last four years.
“Fungible structures combine two different access points, an ETF and an unlisted managed fund, into one underlying trust. This provides investors the ability to buy or sell from either access point, aiming to offer the best of both worlds, whilst retaining the efficiencies of a single vehicle,” he said.
“In the same manner as RI-focused products, we believe investor demand for listed products will continue to grow.”
Since 2018, Mr Nguyen said the number of offerings in Zenith’s International Shares – Small Companies universe has almost tripled.
“Historically, there has been a combination of factors that have led to limited international small capitalisation penetration within the Australian market. At the forefront has been the well-publicised home country bias of Australian investors, which has led to investors preferring small capitalisation exposures through Australian equities,” he said.
“However, rising investor awareness as to the benefits of international small capitalisation portfolios is changing that, with investors acknowledging the inefficiencies of the market segment, the risk/return characteristics, and the diversification benefits offered by the asset class.”
Mr Nguyen added that small-cap equity managers “generally have less capacity than their large capitalisation peers”, which has historically meant high-quality offshore managers have been able to “reach strategy capacity prior to targeting the Australian market”.
“However, the increase in demand from Australian investors has led to several high-quality offshore small capitalisation managers viewing the Australian market as a primary source of capital, offering their products locally with sufficient capacity available,” Mr Nguyen said.
He said that the growth in global equities has led to a resultant rise in the number of currency-hedged products.
“We believe the growth in currency-hedged products provides investors greater flexibility to determine their own currency exposures while maintaining access to preferred managers and strategies,” Mr Nguyen said.
“The allure of Australian capital remains strong, with Australian investors becoming increasingly spoilt for choice given the increased manager access and differentiated exposures arriving on our shores.”
