Australian fund managers under threat

Australian fund managers are weighted down with product, increasing manage-ment costs and making them vulnerable to overseas competitors entering the mar-ket, says one analyst.

Australian fund managers are weighted down with product, increasing manage-ment costs and making them vulnerable to overseas competitors entering the mar-ket, says one analyst.

Recent legislative changes have eased requirements for foreign investment funds to enter the Australian market. According to PricewaterhouseCoopers’ senior partner Prothero, US managers in particular will be able to offer investors a cheaper prod-uct offering with management expense ratios (MERs) of about 0.5 per cent, almost a third of average Australian MERs.

Prothero says, with more than 2,300 retail funds in the market, Australian manag-ers need to cut back the number of product offerings to gain an equal footing with overseas managers in terms of cost and efficiency.

“All of the major fund managers probably have products they don’t want or need. It’s just a fact of life among them. They set up funds for a perceived market need, or it’s a niche product, or for tax reasons and then several years later they’re out of date.”

But even though Australian managers should consolidate their offerings, Prothero says they won’t. On the contrary, he believes the next 12 months will see a wider spate of offerings.

“I would have an expectation that the number of products will increase,” he says.

One of the key reasons for this lies with the Government’s tax treatment of inves-tors in retail funds.

“The logical response by managers — to rationalise the number of funds — will be hampered by the lack of tax relief on funds rollover from trust to trust. Without that relief, local funds will be more vulnerable to the competitive threat posed by the new entrants unless their MERs are reduced, at the expense of managers’ profit-ability,” he says.