Lower investment returns, waning consumer confidence and the rising cost and volume of regulation are the biggest headaches for chief executives of fund management firms, the 2012 Financial Services Council-DST Global Solutions CEO Report shows.
Released this week, the report is based on a survey of chief executives across Australia's $1.9 trillion wealth management industry. The headline finding was that excessive, inefficient regulation is crippling productivity and thwarting innovation in the financial services industry.
Several specific challenges in the fund management industry could force portfolio managers to alter their asset allocation strategies, and have long-term implications for the Australian sharemarket.
Some CEOs said the 'standard' approach in balanced funds (30 per cent in defensive assets such as fixed interest, and 70 per cent in growth assets such as equities) would, in a low-growth world, no longer deliver the returns investors sought. "This will be particularly true if financial markets recover in a slow and steady manner, rather rebound strongly," the report noted. The implication is that institutional investors will need to take higher risks to generate returns investors have come to expect - and need - to fund a reasonable retirement.
Fund managers are also likely to change the mix of international and Australian equities in their portfolios. One CEO surveyed said, "The Australian investment portfolio mix will need to become more global as the sheer size of superannuation funds outgrows the Australian market size."
Fund managers have traditionally allocated more of their portfolio to domestic rather than international shares. However, the capitalisation of the Australian Securities Exchange ($1.3 trillion) could be dwarfed by an expected $3 trillion in superannuation balances by 2020, and $5.5 trillion by 2030, according to Treasury estimates.
Simply put, Australian fund managers will have to find a home for more of their portfolio in international sharemarkets, assuming the ASX's capitalisation does not grow at a similar rate to superannuation balances, which is likely given the absence of billion-dollar new listings on ASX in recent years and rising global exchange competition for listings.
If funds invest more offshore, investors will face extra risk from currency exposures (or higher costs to hedge currency risks), and local funds managers will need to ensure they have sufficient resources to allocate an increasing part of their portfolio to international equities, and to monitor that allocation.
Another key finding was that the interaction between fund managers and end-investors was changing.
Fund management firms have traditionally interacted with superannuation funds under a business-to-business sales approach, but booming growth in self-managed superannuation funds (SMSF) is an opportunity for funds to develop products for do-it-yourself retail investors. "Growth in SMSFs is at least partly being driven by a desire by people to be more proactive in their saving for retirement. Nevertheless, they will still need professionally constructed investment products in which to invest," the report commented.
As in other parts of the financial services, CEOs of fund management firms said low consumer confidence had been exacerbated by the new financial services industry regulations. "The community sees an industry that is becoming increasingly regulated and could well conclude that it needs to be - further undermining (consumer) confidence."
On future investment returns, some CEOs expected a slow and steady recovery as economic challenges take time to resolve. Others felt the worst had been priced into global equity markets and pointed to historically strong market rebounds after a period of poor performance.
