NZX has flagged further fund management purchases in a bid to build scale in the almost $5.8 billion Smartshares business.
In an investor update released along with half-yearly results last week, the NZX notes Smartshares is “exploring potential acquisition opportunities” as part of a “strategic step change”.
Hugh Stevens, Smartshares chief, said competitive and regulatory pressures were driving the need for scale across the NZ fund management industry with a number of “consolidation opportunities” emerging in the market.
For example, Aon is currently shopping around its NZ master trust and KiwiSaver schemes – that collectively manage about $900 million – using Sydney-based corporate adviser, Allier Capital, to shepherd the deal.
While Stevens declined to comment on Aon, he said Smartshares was reviewing several potential purchases as part of its growth plans.
He said scale was becoming increasingly critical for NZ fund managers as regulatory costs, fee compression (including the ‘value for money’ efforts by the Financial Markets Authority) and competition – from both local and offshore – intensified.
As at the end of July, Smartshares (including SuperLife) recorded close to $5.8 billion under management, up about $100 million month-on-month.
During the first half of 2021, Smartshares attracted over $380 million of net inflows as investment returns added another $231 million to the kitty, according to the NZX presentation.
“Growth activities include being appointed a KiwiSaver Default provider effective from December 2021,” the NZX told investors.
Stevens said the default transition could see Smartshares funds under management rise to about $6.5 billion as the KiwiSaver scheme absorbs its share of the reallocated members.
Smartshares was appointed as one of the two new default providers (along with Simplicity) on the back a balanced fund option priced at a new market low all-in fee of 0.2 per cent.
While the NZX funds management arm has already seen assets almost double since the end of 2019, Stevens said the benefits of scale reach a “step change” above $10 billion as fixed external service provider costs spread across a larger asset base.
Over the six months to the end of June, Smartshares booked operating earnings of $3.9 million (up about $1 million year-on-year) on revenue of $8.9 million. Funds management costs rose to $5 million for the half-year compared to $3.9 million for the same period last year.
Stevens said the fund division had recently added three more senior staff including two newly created positions.
Craig Prosser has joined as client director institutional to replace Thom Bentley, who was hired as the first NZ employee of Australian exchange-traded fund (ETF) firm, BetaShares, in April. Prosser, who returned to NZ recently after a stint in the Middle East, was previously finance role at private equity manager Direct Capital.
Meanwhile, Leon Dillicar and Lisa Foulkes took up the respective new roles of head of product, and, operational excellence manager. Dillicar and Foulkes both started with Smartshares in July, arriving from Westpac and AMP, respectively.
“We’re also recruiting a head of IT for Smartshares,” Stevens said.
Elsewhere, the NZX investment platform business, Wealth Technologies, also turned in solid six-month results, locking-in three new clients to take funds under administration close to $10 billion by year-end from the current $7.8 billion.
The NZX told investors the platform had a “strong pipeline” of potential clients for 2022 suggesting “the 2023 aspirational targets remain valid”.
Wealth Technologies is expected to hit funds under administration between $35 billion to $50 billion by the end of 2023, according NZX projections.
The business was on track to shift the seven clients on the “legacy platform” inherited when NZX bought Apteryx in 2015 to the new-fangled technology built over the intervening years.
Craigs Investment Partners, JB Were, Saturn Portfolio Group and Hobson Wealth are already on the new Wealth Technologies platform with Public Trust also about to move.
Increasing compliance obligations will “force large advisor firms to upgrade their internal platforms” providing opportunities for the Wealth Technologies ‘software-as-a-service’ solution, the presentation says.
“The increasing cost to service clients also impacts medium adviser firms making the Wealth Technologies option cost efficient, allowing scalable growth and reducing operational and compliance risks,” the NZX says.
Wealth Technologies reported a maiden half-year operating profit over the six months to June 30 as revenue of just over $2 million outweighed costs of $1.9 million.
Collectively, funds management and wealth administration now account for about a quarter of NZX revenue compared to under 20 per cent in the same period last year.
NZX total six-month operating revenue was down 3.5 per cent year-on-year to $16.5 million with net profit after tax sliding 16 per cent to $7.6 million.
In a letter to shareholders, James Miller, NZX chair, said: “We see our Funds Management and NZX Wealth Technologies businesses as offering the potential for powerful synergies alongside our core market business. We will also continue to build upon the strategic partnerships in place for our dairy derivatives and carbon businesses to pursue growth.
A key element of NZX’s overall strategy is to build a more diversified financial services business to deliver long-term sustainable value to our shareholders.”
The NZX also rejigged management reporting lines and responsibilities while also naming Lara Robertson as general manager people and sustainability, reporting to chief financial officer, Graham Law.
In December 2014, the NZX struck a $35 million deal to buy the SuperLife KiwiSaver and employer superannuation business from owners Michael Chamberlain and Owen Nash – ultimately merging the operation with its Smartshares ETF operation.