Funds Management in Australia

Fund Management in Australia

The funds management industry in Australia seems to be going from strength to strength with a plethora of new funds coming to market aided by the tailwinds from compulsory superannuation.

The role of active equity managers in Australia does not seem to be diminishing compared to overseas markets such as the US where there has been significant outflows from active managers into passive.

The other noticeable theme in Australia has been the increasing popularity of global funds as domestic equity managers have  struggled for differentiation in an increasingly competitive market that will increasingly become disrupted by enhanced passive investments.

One byproduct of this has been that active managers in Australia have had to lower their fees in some instances.  An example of this has been K2 Asset Management and Platinum Asset Management which have both lowered their management and performance fees across their retail funds in response to declining funds under management.

K2

Platinum

The other feature of funds management in Australia of recent times has been the popularity of permanent capital investment vehicles which target the self managed superannuation market in Australia.

Historically these structures have been listed investment companies (LIC) and the investors in the fund have borne the cost of establishing the fund which can be as high as 3%. Therefore investors start day one already having lost money.

Newer structures such as VGI Partners Global investments Limited LIC and Magellan's Listed Investment Trust (LIT), which is raising up to 9 billion dollers, are having the fees paid by the manager and not buy that investors in the front which is a preferable outcome for investors.

VGI’s LIC

1. The Manager will not receive any Management Fees until all of the Company’s establishment costs, including the costs of the Offer, have been recouped. As a result the Company is expected to list on the ASX with a net asset value equal to the Offer’s $2.00 issue price (see Section 7 for further details).
2. The Manager will pay the vast majority of the Company’s ongoing operating costs, including ASX and ASIC fees, audit costs, legal and tax advice costs and any fees charged by the Company’s fund administrator. The Company remains liable for some operational costs and expenses. For example, for corporate governance reasons, the Company remains liable for, and must pay, the costs and expenses of the Directors (including director fees and insurance costs)1 .
3. The owners of the Manager will commit to reinvesting (on an after tax basis) any performance fees the Manager earns from the Company into Shares, and enter into long-term voluntary escrow arrangements in respect of those Shares

Magellan's offer includes  a "valuable loyalty reward" worth 6.25 per cent to existing investors in their funds up to a total investment amount of $30k.

The outcome from these scenarios if we look at a fund manager's economics as a technology company we are seeing falling ARPU, higher customer acquisition cost but lower churn. The Interesting question is whether the lifetime value (LTV/CAC) ratio is improving?

The fact fund managers are seeking to raise money and permanent capital structures is also indicative of where we are in the market cycle and suggests that the managers believe we are in an environment where capital is easy to raise and they are willing to pay a premium on customer acquisition cost to benefit from not having the risk of redemptions i.e. a higher LTV. Those managers that have secured permanent capital will be able to invest much more aggressively in a downturn and should benefit from improved returns from not having to take a more conservative approach by needing to hold higher levels of cash to meet redemptions which tend to peak as markets are capitulating.