Home / How Australian investors should be equipped for the future

International events of the past 12 months have certainly breathed life into global financial markets, as well as providing investors with new challenges. Heena Chakravorti* of Bloomberg puts the position for Australian investors in a global perspective.

The Australian economy has started to rebound following the commodities rally, and continues to do so. However, while domestic markets have been bringing in broadly attractive returns for investors – in some cases over 9 per cent annualized returns – Australian equities only represent 2 per cent of the world’s stocks by market capitalization, signalling further opportunities out there.

Australian investors can always do more to capitalise on this global growth and are becoming increasingly global as they look to access markets beyond the continent in search of new opportunities to boost profits. A case in point is the Future Fund’s recent move to allocate more of its portfolio to global equities.

At the same time, Australian investment products are experiencing more inflows than ever before from overseas investors. Recently, the FSC, in conjunction with Perpetual Investments, identified that cross-border flows into Australian Managed Investment Trusts had increased at a compound rate of 17.8 per cent per annum over the six-year study period. A total of 62 per cent of these fund-flows came from across Asia-Pacific, as the region’s demand for diversification rises.

This new trajectory and outlook of Australia’s financial markets, coupled with a changing global financial and economic landscape that will impact investing strategies, intense fee pressures, erratic global growth, and technological advancements and competition, asset managers need the tools to help them respond to new challenges.

As importantly, they also need to ensure that they are equipped to handle regulation that could hamper their bottom-line.

A new investment landscape

Since the global financial crisis, much has been done to regulate financial markets.  In the USA, we’ve seen Dodd-Frank – though its future is uncertain – and in Europe, MiFID II is nearing its final stages and could well be adopted as the global standard in market infrastructure regulation. Elsewhere, the global banking sector is being tested by regulations like Basel III and CRD IV.

While the global regulatory jigsaw starts to take shape, regulators in Australia have too been busy creating a regulatory structure that’s extensive, detailed and supportive of a mature investment industry. Investors in Australia, like everywhere else, have to arm themselves with the know-how and technical ability to deal with these changes.

Australia’s Superannuation sector is also under intense pressure to change and adjust for tomorrow’s investors, who live longer and will demand smarter management of their savings. While the Productivity Commission ran its review of Superannuation Competitiveness and Efficiency last year, its inquiry into Alternative Default Models suggests there is still more to do to change this integral part of Australia’s investment sector.

Buy-side technology spend

Globally and in Australia, there are a couple of clear trends occurring in the investment sector.  First, we are seeing higher thresholds of accountability with the buy-side due to changes in the regulatory landscape. Financial regulation has meant that investors and regulators need greater transparency, independence and accountability. Dodd Frank, Basel III and MiFID II have fundamentally changed the way markets operate globally. The impact of these regulations will of course permeate into Australia.

Locally, there are regulatory changes that will have technology-specific impact attached to them. A case in point is ASIC’s Regulatory Guide 97, which requires superannuation and managed investment products to disclose detailed fees and costs.  It will materially change the way transaction costs are analysed and accounted for (especially for unlisted assets), and hence the data and operating systems required to ensure compliance.

Secondly, investors are getting increasingly sophisticated, demanding a broader range of investment options, seeking bespoke solutions, passive investing options and in some cases, investment managers are looking at adopting more quantitative investment approaches or bringing assets and systems in-house.

And thirdly, technology is playing an increasingly important role in fund management and in shaping financial markets. The proliferation of data and analytics is driving investment strategies, and greater computational power is spurring demand for greater scale and flexibility.

As illustrated in a recent Greenwich Associates report the increase in technology spending by the buy-side has been driven by regulatory changes but more importantly, by a need for operational efficiency to support scalable growth.  In Australia, investors are also finding it helps them reach further afield as their investment horizons expand and existing technology cannot adequately support their future investment strategy.

Future of buy-side technology

Australia’s investment firms are constantly challenged to adapt to new demands of increased transparency and the need for timely and accurate data for financial reporting, above and beyond generating returns.  This is driving the industry to adopt and adapt new technology to be more innovative and efficient, reduce opacity and increase portfolio visibility.

Bloomberg understands the future of investing because we work with leading buy-side firms all around the world.  To help address new challenges asset managers are facing, we have built an integrated buy-side technology platform of the future – across portfolio analytics and management, operations, trading, post-trade and compliance.

The next phase for the buy-side will not be about adding more systems and complexity, but consolidating operations across the front, middle and back office. Our entire suite of buy-side solutions will not only efficiently streamline workflows and support future business growth but also ensure that firms will always remain compliant.

In this environment of tighter regulation, extreme market volatility and the imperative for increased efficiency, Australia’s buy-side also has to evolve and hasten its technology adoption. As asset managers adjust to these demands, technology has an important role to play in helping them adapt – and in doing so, freeing them up to do what they do best: invest, innovate and drive returns for clients.

*Heena Chakravorti is the head of the global financial information services company, Bloomberg, for the Oceania region.