Australia’s funds industry has reached a high level of technical development, though a survey of the industry suggests more progress is possible. Sarah Hayward, managing director of Calastone for Australia and New Zealand, shares her views.
“When we first got to Australia, I remember going into a global fund manager’s office to talk to them about the Calastone solution,” says Sarah Hayward, managing director of Calastone for Australia and New Zealand. “When I asked them what their existing process was, they said the order instructions came in on a fax machine sitting on a filing cabinet in the corner. Sometimes the ink ran out or the power went out and they didn’t notice. When they moved office, they moved the filing cabinet and a bunch of faxes fell out of the back. Hundreds of thousands of transactions were just stuck in there.”
That was 2012, when Hayward, who’d been working for UK-based Calastone in London since 2010, had just moved back to her native Australia. Her pitch to the fund management company, which later became a client, was simple: stop using faxes and move to the Calastone network instead. With Calastone’s product, fund managers could send instructions electronically and receive automated statements of transactions, holdings and tax statements. The risk of mistyped instructions was much reduced. The time it took to communicate instructions shrank. No one needed to worry any more if the fax machine ran out of ink.
Australia has grown to become one of Calastone’s most important overseas markets. Recently, the firm expanded into New Zealand to support cross-border coverage between the two countries. Hayward hopes to sign up the remainder of the market that has yet to embrace the Calastone service. The more firms that join, the greater the benefit for everyone in the network.
Given its position in the funds industry in Australia and New Zealand, Calastone naturally has an interest in seeing how the domestic funds industry develops, which is why the firm worked with Funds Global Asia
on a survey of the funds industry. The idea of the research project was to establish how fund professionals in the country expect the industry to evolve.
The results, which were summarised at a Calastone conference in Sydney in October, produced a mixture of positive and negative sentiments. On the one hand, nearly all the respondents (94%) said they thought it was important for Australian investors to diversify their portfolios with exposure to managed funds that invest abroad. Hayward says that this level of belief in cross-border investing is encouraging.
On the other hand, the survey found a relatively low level of faith that two well-known cross-border fund vehicles could gain popularity in Australia. Only 30% of respondents thought Europe-domiciled Ucits funds would become an important part of the product mix in Australia and only 49% thought the Asia Region Funds Passport (ARFP) would be significant in increasing Australian investors’ international exposure.
“What the survey shows is that, although there is interest from Australian investors in investing offshore, there’s a lack of education in terms of knowing the kinds of funds that are available,” says Hayward. “Investors in Australia are more eager to invest in Australian-domiciled funds that invest in offshore assets rather than Ucits or ARFP funds.”
That could change, however. The Australian government is planning legislation to support ARFP funds and the industry is broadly in support. “To date, the lack of a modern, attractive investment vehicle has been holding back our financial services exports,” says Sally Loane, chief executive of the Financial Services Council (FSC), a trade group that is supporting the passport.
The hope is that by playing a leading role in the scheme, Australia’s funds industry will benefit. ARFP funds launched by Australian managers could be passported into countries such as Japan to raise assets from the local population, for example. Calastone, which is also active in Asia, notably in Hong Kong, Singapore and Taiwan, is hopeful that the new passport will lead to concrete benefits for Australian asset managers.
“There are challenges that are being worked on by the likes of the FSC and the industry to ensure Australia has competitive vehicles to offer under ARFP,” says Hayward. “We need to be on a level playing field and that starts with the withdrawal of withholding tax. Getting rid of the tax opens up the opportunity for investors to invest offshore if that’s what they’d like to do. More importantly, it allows offshore investors to invest into Australia.”
On the whole, she says, ARFP is an exciting development, even though its full potential has yet to be realised by some parts of the Australian funds market.
It would not be a surprise if ARFP starts small and gets more popular over time. Calastone’s experience in Australia has followed that trajectory. Hayward remembers that on the first day the Australian service went live, one message went across the network. On the second day, there were two messages. Now, six years on, thousands of messages cross Calastone’s Australian network every day.
Calastone has expanded its offering in that period. The service now allows fund managers to send statements of holdings and transactions as well as tax statements directly to fund platforms. Before this feature was added, fund managers found this process “a real pain point”, she says. Calastone now also allows “in specie” transfers from platform to platform.
However, there remain a number of players in the industry that have yet to join Calastone’s network.
“We’ve got a small number of clients that aren’t using Calastone, which means they are still using fax or some version of automated fax,” she says. “When we talk to those clients, they say it is something they want to do but there’s a fight for resources behind the scenes. The company is looking to create a new fund, and that’s taking all their attention, for example. Sometimes, they think that if it ain’t broke, don’t fix it.
“But, by not doing it, it’s bringing risk into the whole industry. Their counterparties are having to continue to fax them, which is bringing inefficiencies into their process. But with just one connection to Calastone network, our clients are able to process any format and message type, therefore breaking down the barriers of entry.”
Australia has not yet reached the day when fund companies can go to sleep, safe in the knowledge that there is not a bundle of lost faxes behind a filing cabinet somewhere.
©2017 funds global asia