The easy money from managing Australia’s $2 trillion of retirement savings is coming to an end.
Fund managers are being squeezed as some of the largest pension funds bring investment functions in-house and push for an end to traditional percentage-based charges in favor of a flat-fee structure they say is fairer and more transparent. That could threaten the A$16 billion ($11.3 billion) of fees money managers raked in last year, a figure that had doubled in just three years, according to data provider Rainmaker Group.
“This asset-based fee structure, there’s something inherently wrong with it because at the end of the day, we know — particularly with the public markets — how scaleable an operation is,” said John Pearce, the chief investment officer at UniSuper Management Pty, which represents more than 400,000 members and has close to A$80 billion in assets under management. “You manage A$10 billion, A$20 billion, your fixed-cost base doesn’t change that much.”
JPMorgan Asset Management Australia last month reduced management fees on all bond funds, including cutting charges for its flagship global bond fund by 33%. Melbourne-based JCP Investment Partners Ltd. closed entirely, with local media reporting that the loss of some key mandates and fee pressures had taken their toll.
Even providers of exchange-traded funds are feeling the heat. BlackRock Inc. cut some of its ETF levies last month, as did Vanguard Group Inc. Christian Obrist, head of BlackRock’s iShares business in Australia, said the change was “part of the regular review of our pricing strategy.”
Others have been beset by poor performance, on top of fee pressure. Hedge fund KIS Capital Partners Pty is returning money to investors and Platinum Asset Management Ltd., which cut charges in 2017, notched up a fifth straight month of investors pulling money in May as its main fund’s performance lags. Ellerston Capital Ltd. is another casualty, shutting its global macro fund after mandates were pulled, local media reported in June.
UniSuper already manages about 70% of assets internally across domestic and global stocks, cash and bonds, and property. Pearce said the fund knows its strengths and weaknesses, and seeks outside managers with complementary skill sets.
“Can I set up an Asian equities team better than Schroders? No,” he said in an interview in Melbourne last month. “It’s better to understand your limitations and try to get good deals with these guys. That’s what we’ve been doing.”
The pressure comes despite Australia already being highly rated on competitiveness and service. A 2017 Morningstar Global Fund Investor Experience Study that canvassed 25 countries gave Australia an above-average score, based on fees and expenses, regulation and taxation, disclosure, and sales. Only five other nations got that same ranking, while the U.S. placed No. 1 overall. The study gave Australia a top score for fees and sales.
A Financial Services Council study into fees alone published in 2014, meanwhile, found global equities rates were almost 11 basis points lower on average in Australia than elsewhere, while fees for emerging-markets products were 13 basis points below other jurisdictions. “These results, comprising data from some of the world’s largest fund managers, show that Australia has very competitive fees on investment products,” the FSC concluded.
Another challenge has been the slowdown in the growth of self-managed super funds, typically a reliable business channel for products. Self-managed super funds’ AUM increased 5.5% from September 2017 to March while the AUM of industry funds — or those looking after the retirement savings of workers in specific sectors such as teaching, nursing or the public service — rose 21%.
And as those industry funds have grown bigger, they’re developing their own investment capabilities. In the past, according to Telstra Super Pty Chief Investment Officer Graeme Miller, the “skill-sets resided with the fund managers and as a consequence they charged very high margins for a long time.”
“Now that’s changing. The funds have grown and have power to negotiate better on fees, expertise is coming in-house, investment management is coming in-house,” he said. “It’s a good thing because fees have probably been too high for too long, profit margins have been too high for too long and there’s a natural readjustment taking place.”
Prompting a Rethink
Telstra Super is Australia’s largest corporate pension fund with more than A$21 billion in assets invested on behalf of some 92,000 members. It manages about one-third of its money internally now.
Miller said it was inevitable that some companies “won’t be able to adapt quickly enough, either because they lack the scale or they lack the culture.”
As an asset managers, IFM Investors Pty’s Chief Executive Officer Brett Himbury is clear that life as the industry knows it can’t continue. IFM represents more than 15 million pension fund members and has assets under management of around A$127 billion.
“If you’re going to compete in this environment as a fund manager, you’re not having to just compete against fund managers, you’re going to have to compete against the internal option,” Himbury said, referring to when super funds bring expertise in-house. “That will prompt a number of us to think about the structure and quantum of our fees.”