Everyone thinks Australia is a financial services backwater, but Australians most of all.
Ambitious Aussies working in finance want to move overseas. They want to move to London, Hong Kong or New York, where financial markets and institutions are bigger. They figure there’s more room for them and their careers in other parts of the world.
Yet Australia, backwater by reputation, is undergoing a quiet ETF revolution that is putting Hong Kong and London to shame.
In a remarkably short space of time, the country has gone from zero to 100mph in its adoption of ETFs. On its current trend line, Australia is set to be one of the biggest ETF markets in the world.
FOFA – the big bang moment
In his book Liar’s Poker, Michael Lewis noted that Salomon Brothers mortgage traders got fantastically rich in the 1980s thanks to politics. The Salomon mortgage trading department, started by a handful of obese second-generation Italians who spent their entire Fridays eating cheeseburgers, were able to spin endless millions dealing mortgage bonds thanks to congressional tax changes.
In a similar manner, everywhere ETFs have gotten big, it has been due to politics. In the US, they were helped along by Obama’s fiduciary rule. In Canada, it was pushed by Trudeau’s CRM2. In Australia, it was the Rudd-Gillard Labor government’s future of financial advice (FOFA), introduced in 2013, which banned conflicted commissions paid to advisors.
“FOFA largely led to a fee for service model where advisers had to demonstrate their value and provide more transparency on costs,” Balaji Gopal, head of product at Vanguard Australia, told ETF Stream.
“Advisers are now moving…towards benchmarked investments with behavioural coaching business models. They’re outsourcing investments to larger dealer groups or buying pre-packed managed portfolios.”
The effects of FOFA show up clearly in the numbers. In July 2013 assets in the Aussie ETF industry stood at A$5 billion. Yet as of July 2019, ETF assets were $50 billion – a 10x increase in just six years.
The trend is predicted to continue, with one independent review estimating ETF assets could hit $100 billion in 2022.
“It is growing at a 30–35% compound annual growth rate. Even if you are using conservative estimates it could end up around $100 billion,” Mr Gopal adds in agreement.
Superannuation – a $2.7 trillion honeypot
For money to flood into ETFs, there needs to be a honeypot to loot. In Australia, that honeypot comes from superannuation - especially self-managed superannuation, where savers take control of their own retirement savings - the country’s pension system.
Almost uniquely, Australia forces all workers to save 10% of their pay for retirement. The system, introduced in 1991, has meant that Australia has a $2.7 trillion savings pool from superannuation alone – one of the largest in the world. (And a $5.5 trillion savings pool once other non-super assets are included).
This Smaug hoard creates a demand for assets, especially foreign assets, explains Brett Cairns, the CEO of Magellan, a Sydney-based ETF provider.
“Because of the way…super is growing over time, Australia is going to be a net creditor nation…Australia as a country owns a sizeable chunk of Google. The weight of money and sheer savings, if we end up moving to net creditor, means we have to have access to foreign assets.”
He adds that Australian self-directed investors can often buy Aussie equities themselves meaning it is often funds with international exposure that prove most popular to Aussie investors.
Australian banks back away
While the overall picture is one of clear success, there have been other obstacles to development which Australia has had to overcome. This includes, perhaps most crucially, the ambivalence of the local banks.
In most countries, the biggest ETF provider is one of the biggest banks. In the UK, the biggest is iShares, which is a legacy of Barclays’ ownership. In Switzerland, it is UBS. In France, it is Amundi and Lyxor (owned by SocGen). In Germany, it's Commerzbank and DWS (owned by Deutsche). In Canada, it is RBC and BMO – and so on.
That banks should have an advantaged position in retail distribution makes a kind of sense. It is the banks after all – as the famous robber Willie Sutton would have things – that know where the money is.
Where independent asset managers have to hit up retail advisors one by one, banks can “cross-sell” ETFs among their existing networks. Banks also have scale, technology and know-how advantages in asset management.
Yet in Australia the local banks have stood to the side, refusing to become ETF providers themselves. While some attempts were made early on – the Commonwealth Bank had a crack at an ASX 200 ETF, ETF Securities and ANZ attempted a joint venture – the banks have mostly sat this financial revolution out.
Local asset managers like active ETFs
While the Aussie ETF market has boomed, it has mostly been a foreign-owned and foreign-run operation. The biggest five ETF providers – in order: Vanguard, BlackRock, BetaShares, State Street, VanEck – are all majority-owned by foreign companies.
Some local asset managers – almost all of which have been based in Sydney – have had a crack at setting up ETF shops. However, they have almost always opted for active ETFs, which are sometimes called EQMFs.
Active ETFs are quite popular with Aussie investors, and Australia provides an almost uniquely supportive framework for active products to list on exchange.
However, there is a gap – and an increasingly self-conscious one – between the active Australian-owned side of the ETF industry, and the passive mostly foreign-owned side of the industry.
“Setting up an ETF provider is capital intensive and at a low margin,” said Bernie Thurston, CEO of ETF data company Ultumus.
“So it does not entirely surprise me that locally-owned ETF managers in Australia have opted for higher-margin active products. The fee war on core products in Australia is also surprisingly advanced given the market is at $50 billion.”
To the future
While the future is in most instances hard to predict, in Australian ETFs the likely scenario seems obvious: up. And if the Aussie ETF industry continues its six year tear, on expects that soon ambitious Aussies working in asset management could start looking closer to home for opportunity.
ETF Insight is a new series brought to you by ETF Stream. Each week, we shine a light on the key issues from across the European ETF industry, analysing and interpreting the latest trends in the space. For last week’s insight, click here.