Globalisation will put savings in competent but disinterested hands

Friday 7th September 2001

As the government moves into the final stages of legislating a new state-funded superannuation fund, it is timely to take a look at the size, nature and prospects of the professional funds management industry.

The FundSource survey shows New Zealand-based fund companies manage a total of $41.3 billion, the largest being AMP Henderson with a market share of 22.6%. The top 15 companies (33 provide data to FundSource) make up 94.6% of funds under management. Of these, nine are subsidiaries of Australian groups with the other six being a UK insurer, a US insurer, a government-owned institution, a New Zealand-listed company about to move its head office to Sydney and two privately-owned New Zealand firms.

The concentration of funds reflects the global industry trend of consolidation through merger activity. This has led to numerous mid-size companies such as Colonial, Prudential, Norwich, GRE and Oceanic being bought and merged in the attempt to obtain economies of scale.

Of the $41 billion, by far the largest share is invested in global equities, 27.2%, while Australasian shares make up only 16.7%. While this shows how enthusiastically New Zealanders have diversified their investment risk to a level higher than most developed world economies, the downside is the increased portfolio exposure to the impact of a global recession.

The total has stayed static over the past year, reflecting the weak nature of investment markets and the dampening of investor enthusiasm for equities. However, when the total funds are compared with overseas markets, it reveals the low the level of savings into professionally managed funds.

Each of the top-five asset management firms in Australia single-handedly manages more than the total New Zealand industry. The Australian industry is 18 times larger and is growing at a faster rate. In an industry where labour and capital is highly mobile, and in the absence of local industry growth, it appears sadly inevitable it may follow the sharebrokers across the Tasman.

This loss of capital control would be a major long-term economic concern. New Zealand businesses could end up as being solely assessed as "foreign" and therefore carry "non-domestic" risk by analysts based in other countries (even if the underlying funding was from New Zealand investors). This may sound extreme but globalisation is putting increasing percentages of New Zealanders' savings into competent yet disinterested hands.

Is it possible to create a vibrant, competent and domestically committed funds management industry? In most countries, the extreme being Singapore, a licence to operate a fund requires a commitment to a certain business base. Additionally, the government needs to address the inconsistencies in the tax system that skews personal investment toward housing and do-it-yourself investing, away from professional management of savings.

New Zealand is unique in having such an uneven tax playing field.

These suggestions would encourage widespread competition that is good for the investor but would also ensure a knowledge industry remains locally based, good for the tax base and for capital-hungry businesses.

David van Schaardenburg is executive chairman of FundSource Research, the investment strategy and funds management research company

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