ASX’s bank ambush: Kohler

Australia’s fund managers and the super funds that use them have underperformed the sharemarket horribly as the market has recovered this year.

The return of double-digit performance is being reported this morning as a triumph for the industry, but in fact bank CEOs would be clutching their brows. That’s because the ASX itself is becoming a big threat to their growth strategies.

Yesterday we learned from ChantWest that the median “all growth” fund option (100% growth assets) produced a return of 18.5% for the 12 months to the end of November, after fees and taxes. The All Ordinaries index went up 26.9% in the period, before dividends.

For the calendar year to date the median growth fund return was 11.9%. That compares with a 27.3 per cent rise by the All Ordinaries index.

There’s nothing particularly novel about this – investment managers and super funds, on average, almost always underperform the sharemarket after fees because their investments are diversified to reduce risk.

The problem for the major banks is that their entire wealth management strategy is based around persuading consumers of the benefits of financial advice that leads to pooled investment management – either on proprietary platforms or in superannuation master trusts – and charging handsomely for that process.

And the ASX is increasingly and deliberately becoming a direct competitor to the managed fund industry.

The ASX already has a limited range of exchange traded funds (ETFs) and exchange traded commodities (ETCs) that provide a cheap form of pooled investment in industries, sectors, overseas markets and commodities. This is on top of the actively managed listed investment companies (LICs) and property trusts on the ASX.

Ian Irvine, who joined the ASX from AMP and is now head of listed managed investments, has the job of quickly building the range of listed funds available on the exchange.

As well, there are at least two cheap administration platforms for advisers whose clients invest in directly ASX-listed securities and funds rather than unlisted managed funds via adviser platforms. They are Praemium and Iress’s Xplan.

The cost of this package of listed ASX funds – ETFs, LICs, LPTs, managed on the Praemium or Iress software – is a fraction of the cost of the usual financial planners’ system that has three layers of percentage fees: advisers, platform and fund manager. This cost difference is the key reason for the rapid growth of self-managed super funds.

It means the ASX itself is undoubtedly the main challenge to the banks’ strategy of consolidating and dominating wealth management in Australia – it is a cheaper, better performing alternative.

NAB’s bid for AXA is all about building scale in financial advice and putting more portfolios on the Navigator platform that the bank bought when it acquired Aviva in June.??Navigator, and the other platforms used by advisers to administer their clients’ portfolios, charge a steady fee stream of up to 1% for doing very little for the clients apart from manage their investments in various managed funds.

Some of them handle direct share investments as well, but their original purpose was – and still is – to administer a managed fund portfolio and the commissions that flow to financial planners from them.

Thanks to its partnerships with the promoters of ETFs and LICs, as well as Praemium and Iress, the ASX is building a significant threat to the banks’ strategies based on unlisted managed funds and expensive platforms.

This article first appeared on Business Spectator.