Growing Distribution in an Age of Insourcing

Australia is home to one of the largest investment management markets in the world and superannuation funds, or ‘supers’, represents a significant portion of the country's savings and investment landscape with $3.5 trillion in the system as of June 2023[i]. Traditionally, superannuation funds outsource their equities and fixed incoming investment to external fund managers. As a result, many asset managers based in Australia have focused their distribution strategies on the superannuation market.

Today, this is changing. Now, more super funds are bringing the management of equities and fixed income in-house and opting to outsource more esoteric asset classes, such as alternatives. This trend has impacted larger asset managers in Australia who feel the squeeze of a key distribution channel that is drying up. In a May 2024 study of 300 asset managers from Northern Trust, The Next Chapter in Driving Growth in Asset Management, when asked what investor trends are impacting their distribution strategy, nearly 67% of Australian-based respondents selected ‘insourcing investment management.’

In this new landscape, asset managers may need to pivot to new asset classes where super funds lack in-house expertise, such as alternatives, or to products better suited to the aging superfund member demographic that is more focused on capital preservation and income generation for retirement. Alternatively, they may need to look beyond managing Australia-focused investments or seek new distribution opportunities beyond Australia. And managers may benefit from the capabilities of asset servicing partners that can help them on this journey.

Finding the Niche in Alternatives, and Other Investment Trends

In recent years, the superannuation industry has continued to consolidate as funds seek to reduce fees and enhance performance for their investors, starting with AustralianSuper in 2013[ii].  According to a report published by financial services company Mercer in March 2024, only 77 super funds will exist within the next four years, down from 107 today and 232 in 2015[iii]. 

At the same time, the largest super funds are insourcing to save costs and improve transparency. With fewer super funds available to service combined with a shift to insourcing, Australian asset managers may look to diversify their product set to support new asset classes, such as alternatives, to remain competitive.

The Northern Trust study found that, when asked which investor trends most greatly impacted managers’ distribution strategy, nearly 47% identified a ‘shift in allocation to alternative assets’. Additionally, the survey found that certain alternative assets, such as infrastructure, private credit, and real estate, were among the top asset classes that Australian-based managers plan to increase their allocations. 

To successfully venture into newer arenas like private markets, managers require specialized expertise and cutting-edge tools, such as private capital administration capabilities, which may not be readily available in-house to those whose primary specialty lies in the equity and fixed income markets. For example, managers may encounter unexpected challenges effectively managing their private market data to make informed decisions. This creates a new challenge – should managers seek to acquire a smaller or “niche” firm that already specializes in these asset classes, or should they try to hire and build their own team of experts? Each firm will have its own unique make-up of expertise and people, and it is critical that they carefully assess their current capabilities and resources before taking the plunge into alternatives.

Among other investment trends in Australia is the growing need to support the aging member demographic that were among the first to invest in superannuation funds, and managers can tap into new opportunities by offering products focused on preserving capital and generating income. Consider this finding from Northern Trust’s study: nearly 57% of Australian-based respondents identified the ‘development/expansion of retirement income products’ as an investor trend impacting their distribution strategy. To address this trend, managers may consider incorporating products such as annuities into their distribution strategy, which can enhance the stability and predictability of income for investors. Still another investment trend is the growing popularity of exchange-traded funds, or ETFs. Australia’s ETF assets have doubled in size over the past three years, surpassing A$150bn ($95.69bn) as of the end of July 2023[iv]. ETFs are desirable because they are dual listed, offer diversification, and provide investors with ease of access to the market. 

Looking Beyond the Australian Lens 

Managers that prefer to specialize in the equity and fixed income markets may also be able to expand their expertise beyond Australian securities. Consider these findings from a report published by Coalition Greenwich, which found that asset owners in Asia expecting to hire a new external manager to support both fixed income and alternatives increased in the 12-month period from 2022 to 2023[v]. While this provides an opportunity for growth, it also creates increased complexity due to the differing regulatory requirements that they may face in each country, and the inherent market expertise it requires to navigate successfully. They also must be able to understand compliance requirements and tax implications. From an operations perspective, they may need to open a global trading desk for non-domestic exchanges and consider other factors, such as foreign exchange expertise. They may also need to review their current technology infrastructure to ensure it can support international expansion.

Expanding Client Reach into New Markets

Another option some managers may consider for increasing their distribution in a shrinking market is broadening their Australian investment expertise to investors outside of Australia. In Asia, for example, the presence of external asset managers has grown in the past decade due to economic growth, regulatory changes and evolving investor needs. According to a report from Coalition Greenwich, the total amount of assets available to external managers in Asia increased in 2023, maintaining “a 10-year run of growth in outsourced assets^iv .”

One of the biggest challenges facing asset managers that choose to expand into global markets is the ability to understand local culture, language, and best business practices in the geography they are looking to enter. While some countries do not have a strong preference towards their servicing model, there are others in the region that prefer a highly localized experience. As a result, managers may want to build out global servicing models where teams operate out of regional hubs. This again prompts the ‘buy or build’ question, and each firm will have to assess its own resources and capabilities before expanding.

The landscape for asset managers in Australia is transforming with the ongoing consolidation of superannuation funds and their move to insourcing. To stay afloat, it is crucial for managers that primarily distribute to superannuation funds to adapt their distribution strategies, identifying the ‘gaps’ within their operating models and with an eye to broadening their distribution strategy beyond the super fund market. Managers can do this by expanding their strategies to include new asset types, such as alternatives, annuity products and ETFs, expanding beyond Australian securities or extending their reach globally into new markets.  An asset servicing partner with global reach and expertise can help support the needs of a new distribution strategy. 

[i] Shaping Super 2024 (mercer.com)

[ii] How super funds are changing the investment landscape (jpmorgan.com)

[iii] Shaping Super 2024 (mercer.com)

[iv] Australian ETF ‘underdog’ is taking on Vanguard and BlackRock (ft.com)

[v] Amid Challenges, Asset Managers in Asia See Positive Signs for Long-Term Growth | Coalition Greenwich