Investors are going to find it harder and harder to place large sums of money with recommended Australian equity and small cap managers, according to Frontier Advisors.

Many of the firm’s favoured managers are closed to new clients due to capacity constraints with their strategies, with some also closed to new cash-flows from existing clients. This is a problem that Fraser Murray, head of equities research at Frontier Advisors, believes will only get worse – the current size of the ASX is $1.57 trillion, while there is $1.84 trillion invested in superannuation.

In some cases, he said, recommended managers could have taken double or triple the amount of money if not for the capacity constraints with their strategies.

The growing size of superannuation funds, partly caused by mergers, have left funds looking, but sometimes unable, to place unwieldy mandates of up to $1 billion with managers.

“Clients do not generally appreciate how tight the market for good quality domestic equities managers is getting,” he said. “In the next three to five years, it is only going to get harder and investing into small caps, in particular, may reach a saturation point. Funds continually want to allocate more to small caps, but the capacity to do so is not on the rise.”

This issue has been one of the triggers for many bigger funds to manage money in-house.

Harvey Kalman, head of EQT corporate fiduciary and financial services at Equity Trustees, said he was seeing more and more investors move to global equity allocations because of these constraints, much of it into passive allocations which he said provided a natural hedge to earnings from the domestic market.

“Those Aussie managers who understand the capacity and do not get greedy, and a lot of them do, have closed to investors a long time ago,” said Kalman. “Paradice is a classic example, he closed three of his four funds. Everyone gives him a hard time, but he knew that you cannot take all of this money, because you only have a limited capacity to really add value and if you take too much money all you are doing is diminishing the returns of the people who backed you originally.”

The comments coincide with the publication of the Russell Investments/ ASX Long Term Investing Report which suggests the long term outperformance of Australian equities maybe at an end.

The report noted that the margin of outperformance of global equities in 2013  (a 43 per cent return) over Australian equities (20 per cent) was the widest margin since 1997. On a hedged basis the underperformance was 9 percentage points.

This issue is being discussed in a panel session at Frontier Advisors annual conference this Thursday, June 26 in Melbourne. The panel is made up of Fraser Murray, head of equities research, Frontier Advisors, Martin Conlon, head of Australian equities, Schroders and John O’Connell, head of equities research, Macquarie.

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