Ian Patrick, chief investment officer of the $280 billion Australian Retirement Trust, says the headwinds facing asset management businesses will become an “ongoing reality” as competition for super fund capital heats up, but ART won’t be driven to more internationalisation by the shakeup.
The comments came after First Sentier Investors said it will hand back $14 billion to a dozen of its fixed income and Australian equities clients in the next few months, after shedding four investment capabilities that it said have been “unable to achieve growth”.
Just one day later, global asset manager T. Rowe Price also said it would close its Australian equity strategy, due to a lack of sustainable scale.
Both came after the significant downscale of London-listed Abrdn last year, when the asset manager offloaded its Australian equities funds and financial adviser sales operations to Melbourne’s SG Hiscock & Co, citing super funds’ pivot away from active management to drive down fees.
Weighing in from a client perspective, Patrick tells Investment Magazine that questions about the economics of asset managers’ business models have been around for a while and will be here for years to come.
“I can remember that question being asked from the point when we had what I called peak Aussie boutique manager proliferation,” he says.
“If you went back decade or more, everybody who felt they had some skill could hang up a shingle and open up a boutique in Australia, but that has proven to be far tougher on an ongoing basis.”
Asset managers need to expand their capabilities for valid commercial reasons, he says, but these capabilities cannot serve just one single mandate.
“[They might say] I don’t want all my eggs in the ART basket, because if ART decides to pull the mandate then I’ve got no business,” Patrick says.
“That means they either become less relevant to us, as in they’ll only offer us a small degree of capacity, which is somewhat unhelpful to us managing a big portfolio; or they tend to take that capacity completely out of the institutional market because they’re getting beaten down on fees to a point where it’s uneconomic.
“Or alternatively, they’re being asked to put their business at risk. So I think that [manager shakeup] will become an ongoing reality.”
Despite its volume of funds under management, ART is an advocate for working with external managers and has no plan to move beyond its circa 36 per cent internalisation rate now, despite what’s happening in asset management, Patrick says.
“I don’t know that it’s that causal,” he says.
“We may find different ways of giving effect to an exposure. For instance, in Aussie equities, you might move more to enhanced index because you just can’t get the size of active share management that would make a difference to your portfolio.
“I do not think it is as great a likelihood in unlisted assets [because] it is not the kind of thing that a fund can build easily internally.”
‘Valuable’ presence
ART this week opened a London office not too far from the iconic Marble Arch, joining the likes of AustralianSuper and Aware Super to more closely harvest the region’s investment opportunities.
However, compared to Aware Super executives’ highly publicised meeting with King Charles at a Buckingham Palace reception and conference appearances alongside Chancellor Jeremy Hunt, ART’s office grand opening appears much more modest.
While ART head of global real assets Michael Weaver did meet with UK foreign secretary and former prime minister David Cameron while the latter was in Australia, the keyword for its UK operation is “functional”.
“The point is having a dedicated space…fit for size for what our footprint is in the UK, and completely discreet so we can conduct any business in a confidential way,” Patrick says.
Three portfolio managers already on the ground in London each came from the infrastructure team and that’s where the most enticing opportunities are in the UK, Patrick says. ART is already a direct investor in Bristol and Birmingham airports, but thematics including the energy transition and digital are appealing.
“In several cases, we have an ability to appoint directors to the boards of those [infrastructure] assets, which do result in a more active – and perhaps intensive – engagement on our part, both with the assets and with the managers who help us in managing those assets,” Patrick says.
“We will continue to acquire additional assets into the infrastructure portfolio, so being able to engage with managers through that identification process, and co-diligencing before we make a decision to invest, is all valuable.”
Eyes wide open
While the Australian superannuation system is picking up more and more international recognition, a lack of brand recognition of Australian funds remains a hurdle to hiring investment talent in so-called “deep financial markets” like the US or UK.
While ART doesn’t have any plans to hire on the ground yet, Patrick acknowledges some challenges on that front.
“The challenge is creating the sense of awareness of what differentiates ‘the super purpose’ from any other purpose, whether it be a for-profit fund manager, or a domestic asset owner like the Universities Superannuation Scheme or Railpen,” he says.
“But I have similarly heard anecdotally that the broader awareness of Australian asset owners has increased multiple-fold since pre-COVID, and that’s been a function of their continued presence.
“The fact that they have been stable holders of assets and deployers of capital, and as more and more make it into the top 30 asset owners in the world, that awareness lifts.”
For that reason, Patrick says if ART does decide to hire overseas one day, the talent’s sense of connection with the Australian market will be important. Locally, the Sunsuper and QSuper separation in the investment teams ended in March last year, and that unification is important for Patrick, regardless of markets.
“I’m not going to pretend it’s going to be straightforward from the get-go to attract people into what would be a relatively modest office with a need for deep connectivity to Australia,” he says.
“Whilst we haven’t made this decision, it’s not everybody’s cup of tea to spend three months or whatever it happens to be on the ground in Australia being assimilated into the organisation before redeploying back to home office, whereas we would probably want that.
“So we go in with our eyes wide open.”
This article has been updated since publishing.
