Chief investment officers will alter allocations and reject domestic fund managers as higher employer contributions to the Australian superannuation system build larger asset pools, new research has found.
Mandatory increases raising the employee contribution rate from 9% to 12% by the end of the decade will see those managing assets on superannuation scheme members’ behalf change their portfolio allocations, according to consultants Casey Quirk.
Allocations to global and international equities will take off dramatically, with more than Aus$120 billion flowing into these securities in the next decade, the consultants predicted.
Around Aus$60 billion will be withdrawn from local equity investments, meaning domestic fund managers, which for the moment have limited capacity overseas, stand to lose out.
Ben Phillips, a partner at Casey Quirk, said: “The Superannuation Guarantee Contribution reforms intensify challenges faced by Australian fund managers.”
He said that while the increase would “add fee-generating assets for Aussie firms to manage” it would also apply further pressure on long-term profitability among local asset managers.
Phillips said international fund managers would be targeting the Australian market more readily due to the larger asset pools, and a relatively low barrier of entry would allow them to do so, often at the expense of local providers.
To compound the problem for local fund managers, a paper by Round Tower Solutions said superannuation schemes were likely to bring investment in-house to better control risk management functions.
Australian superannuation assets are some of the fastest growing in developed market economies, according to the investment consulting firm Towers Watson’s latest Asset Allocation Study. In the decade to the end of 2011, these assets grew by an average annual 17%, from $270 billion to $1.3 trillion, ranking the country level with Canada in US dollar terms.
Australian investors have also been some of the keenest to move into alternative investment strategies, according to Towers Watson. The consulting firm reported a 10 percentage point shift in asset allocation to these strategies – at the expense of equities – over the last decade.
Casey Quirk estimated that Australian superannuation assets would be over Aus$2 trillion by 2021, but much of the revenue earned from this increase would not end up with domestic fund managers.
Phillips said: “To compete effectively, Australia’s fund managers will need to improve distribution, expand their investment offerings, embrace international markets, especially in Asia, and develop long-term incentives to attract and retain talent.”