By Penny Pryor
SYDNEY — Institutional investors in Australia are riding a wave of growing assets, but that growth will force a change in their investment outlook.
Assets under management in Australia, which grew more than 8% a year during the past three years, are expected to top $1 trillion (US$749 billion) in 2006. (All remaining asset figures in this story are in Australian dollars.)
And the Australian government is in the process of establishing a "Future Fund" to finance outstanding public servant pension liabilities. The Future Fund assets, to come from government surpluses and sales of government assets, are forecast to add another $140 billion to the growing pool of assets by 2020, $40 billion of which could be contributed this year alone.
The Future Fund will undoubtedly have a significant impact on the Australian asset management marketplace. Local funds managers and pension funds have been grappling with the issue of finding excess returns in an overcrowded environment for many years, and adding a behemoth competitor for prime investments will only increase capacity issues.
During the quarter ended Sept. 30, total funds under management in Australia rose 4.6% to $909 billion, according to the Australian Bureau of Statistics, as the Australian equity market, as measured by the ASX/S&P 200 rose 8.5%. Australian bond prices fell as the five-year Treasury bond yield dropped 3%.
Superannuation, or pension, funds still account for the bulk — 52% — of total assets under management. Under Australian law, employers are required to contribute 9% of all employees' wages into a superannuation fund, ensuring a steady flow of funds. The recent increase in total assets also has been aided substantially by a 32% rise in the Australian equity market for the 12 months ended Sept. 30.
Despite the strong showing by domestic equities, many investment consultants have been recommending their clients adjust their traditional equity allocation — generally 35% to 40% of total assets —in the interests of better long-term results. With a market capitalization of just $1.12 trillion at the end of 2005, the Australian equity market is small in comparison to the growing size of the managed funds market and alternative assets are taking a growing importance in asset allocation strategies.