Australian investment management fees have plunged by up to 50 per cent for equity funds over the last five years, new research from Morningstar shows.
The Morningstar overview of the A$2.6 trillion Australian managed funds market published last week says the indirect cost ratio (ICR), which “includes management and performance fees as well as legal, accounting, auditing, and other operational fees”, has fallen for most asset classes over the five-year period ending June 2015.
“The median ICR for global equity trusts fell 0.50% over the period 30 June 2010–30 June 2015, and fell 0.28% for Australian equity trusts over the same period,” the study says. “Importantly, these are published fee rates. They do not include the impact of any fee rebates, which would reduce the stated figures. These figures are for investment trust vehicles only, and do not include individual mandates, which are typically managed at lower fee rates than the wholesale rates.”
In fact, the report, authored by Anthony Serhan and Peter Gee, Morningstar’s head of research strategy Asia Pacific and research survey manager respectively, says the results confirm a Financial Services Council Australia (FSC) survey showing teh country’s funds management fees “are among the world’s lowest (if not the lowest)”.
The FSC survey of global investment management fees based on a A$100 million mandate found Australia costs were between 12-20 per cent lower for offshore equity asset classes and about on par for global bonds.
“Anecdotally, the FSC heard from several fund managers that on most occasions, approval had to be sought on a regular basis from head office to lower the fees charged in Australia in order to win business…,” the report says. “Further, if the fees charged to Australian investors are lowered significantly further (with a wider gap between Australia and overseas jurisdictions), there is a risk of these global managers removing their products and investment capabilities from Australia.”
Australia is one of the three A-rated jurisdictions for fees and expenses in Morningstar’s latest ‘Global fund investor experience report’ along with the Netherlands and the US. On the same scale NZ ranks three notches back with a B – an improvement on previous outings.
Along with fee compression, the super-charged Australian-domiciled investment management industry has also seen total funds almost double in 10 years, Morningstar says. According to the report, of the A$2.6 trillion sourced from Australian investors as at December 2015, approximately A$1.7 trillion was managed by home-based fund managers, of which about A$1.35 trillion appeared in the Morningstar database – up from just over A$700 billion 10 years previously.
“… the value of assets under management has increased by 6.6% per annum on average since 2005,” the report says. “This growth has been fueled predominantly by mandatory superannuation savings, a trend set to continue as Superannuation Guarantee entitlements are legislated to increase from the current level of 9.5% to reach 12.0% by 2025.”
However, over the 10-year period the composition of underlying investment structures has changed markedly with retail funds going backwards from about A$370 billion in 2005 to A$326 billion a decade later.
Morningstar attributes the retail fund decline to the growing use of wholesale funds – a sector that jumped almost 80 per cent over the 10-year stretch – by Australian investors via administration platforms (which aggregate retail money).
But the report shows the biggest increase was seen in the use of ‘discrete mandates’, a strategy increasingly-employed by the massive, and consolidating, superannuation fund sector
“Discrete mandates have experienced incredible growth from A$206.1 billion in December 2005 to reach more than A$817.1 billion at 31 December 2015,” the Morningstar study says.
Meanwhile, the top 10 manager landscape has changed considerably over the six years to December 2015, the report shows. According to the report, four of the 10 largest Australian-based managers in December 2009 failed to make the same list six years later while rankings of all survivors were reshuffled.
State Street Global Advisors, number five in 2009, topped the 2015 list with A$167 billion under management, more than triple its previous amount. AMP Capital climbed into second place from fourth in 2009, reporting more than A$100 billion under management, closely followed by Commonwealth Bank/Colonial First State (A$94 billion) and Vanguard ($88.3 billion).
Newcomer to the top 10, the industry superannuation fund collective, IFM Investors, leapt from 12th in 2009 to fourth in the latest rankings as funds under management rose from A$20 billion to almost A$70 billlion.
BlackRock, Schroder, and UBS also entered the Australian top 10 in 2015 rising from rankings near 20 in 2009.
Morningstar also found a number of other changes in the Australian funds industry over the study periods, including:
- Investment managers on aggregate have reduced exposure to Australian equities and increased international equities;
- Consolidation of managed funds since 2009, the number of funds has fallen, however, the overall level of assets has increased;
- Composition of funds has changed since 1994—growth in number of pension and annuity funds.