Australian institutions are investing more in international equities than ever before, but making the most of a trip down under requires sussing out exactly where the cash is
While it can hardly compare to the financial centers of New York or London, the good news about Australia is that its institutions are investing more in international equities today than ever before. The trick is sussing out where the cash is and planning an efficient and, ideally, fruitful trip down under.
Australia’s pension funds are flush with cash due to the country’s compulsory pension contribution system. The government also recently launched a new pension fund called the Future Fund. In the first quarter of 2006, A$24.6 bn ($18.6 bn) in new funds flowed into this market, according to market research firm Plan for Life. Overall, the total number of equity funds is up more than 20 percent in this market compared to the same period last year.
Mini-me
It’s best to think of the Australian equity market as a miniature version of other capital markets. Only 1.2 percent of total world equity resides here. The domestic buy side weighs in at $258 bn in total equities under management versus $15 tn for the US buy side, according to CapitalBridge.
Planning a roadshow to Australia’s sunny climes is the perfect antidote to the Northern Hemisphere’s winter chills but before you start packing for an Antipodean roadshow, be sure to investigate the local buy side.
The quirk here is that while many Australian investment houses have equity funds with a mandate to invest in international equities, a number outsource this function as they lack in-house expertise. For instance, BT Financial Services’ Australian arm recently hired US-based fund manager AQR to manage its A$3 bn international equities fund.
With this in mind, it’s critical to find out which funds can make a direct investment in international stocks before setting up meetings in Australia.
The big boys
Colonial First State is Australia’s weightiest equity fund, with $23 bn in equity under management according to CapitalBridge. It conducts a considerable amount of in-house research on international equities.
The second-largest firm in terms of equities under management here is State Street Global Advisors, with $22 bn under management. Other buy-side targets include AMP Capital Investors, with $18 bn under management, and Barclays Global Investors Australia, with $13 bn. All of these companies have in-house international research arms.
A number of Australian investment houses are upping their allocation to international equities, providing more targeting opportunities for companies. ‘This reflects growth in the Australian fund management industry and funds under management,’ comments David Lindsay, managing director of IR consultancy Channel Financial Communication.
Perpetual is one of the firms increasing its stake in international equity. It recently announced the decision to increase its exposure to international equity by 20 percent and hired former members of the Bank of Ireland’s international equities team. Another good target is UBS Global Asset Management’s International Share Fund, which is managed locally and, obviously, focused on international investments.
One area of increasing interest among local buy-siders is that of real estate funds. Citigroup last year raised A$263 mn from the Australian market to invest in a portfolio of US property assets, Reckson New York Property Trust, which it then listed on the Australian Stock Exchange.
‘Many Australian investors are seeking high absolute returns in real estate investment, which are often more readily available in offshore markets,’ observes Simon Ranson, head of real estate in investment banking at Citigroup in Sydney. ‘Listed offshore real estate opportunities can generate considerable interest.’
There is also an increasing number of boutique firms that invest directly in international equities. By far the most highprofile in the Australian market is Platinum Asset Management, which has some A$20 bn invested in international equities.
‘If I like a stock, I will invest up to A$600 mn in it,’ says Platinum managing director Kerr Neilson. A market veteran, Neilson reminds companies to visit Australia for the right reasons. ‘When the directors have helped themselves to a large number of options, they can become energetic and want to travel the world to ensure the stock price reflects their brilliance,’ he says. ‘We have no interest in these presentations.’
Lay of the land
Most investment dollars are concentrated in Sydney. According to CapitalBridge, of the top ten equity funds in the Australian market, only one is outside Sydney – this is Queensland Investment Corporation (QIC), which is in Brisbane. Visiting companies therefore spend most of their time in Sydney and occasionally go to Melbourne, as there are still some main targets there.
Melbourne-based institutions include Goldman Sachs JBWere Asset Manage-ment, Invesco, Portfolio Partners and Balanced Equity Management. There are several boutique investment firms in Melbourne, including Cooper Investors and SG Hitchcock. The latter is focused on investments in the property sector.
A trip to Brisbane on Australia’s east coast will put you in touch with government-backed QIC, but the other major Queensland investment house, Suncorp Metway, outsources its global equities investment to other managers.
In terms of presentations, there’s really not much difference between the expectations of Australian investors and investors elsewhere. Return on capital, profitability, a clear description of the business and an assessment of the strategic position and value proposition of the company are the kind of information most investors will expect from presentations. Strong board and governance structures are also essential.
IROs from outside Australia should be aware that there is a significant taxation benefit Australian companies and their shareholders enjoy that is not extended to overseas companies. This is known as the franking credit system. Through it, companies are able to pass tax credits to their investors, which shareholders use to reduce their own tax liability. This factor will be taken into consideration by most investors before they make the decision to purchase international shares.
Why bother?
Aside from Australian investors’ increasing interest in overseas equities, there is another good reason why international investors should consider the Australian market as a source of funds. The government’s new Future Fund has been vested with A$18 bn in seed capital, and this is expected to grow to about A$140 bn by 2020.
These funds have to be spent, and capacity constraints in the Australian market mean at least some money will end up offshore. Although it’s too early to say where the money will
be invested, Lindsay says the fund’s board is expected to be ‘very concerned with the corporate governance’ of the assets it owns, something that should be taken into consideration by any IROs planning presentations to the fund.
A final warning to all IR professionals wanting to tap into the Aussie market: the time difference and Australia’s isolation can make it quite difficult to do business with the Northern Hemisphere.
Justine Brant, senior vice president of corporate services for Citigroup in Sydney, says IROs are frequently surprised and somewhat daunted by the 24-hour flight to Australia. ‘The trip can be worth it, however,’ she says. ‘Aussie investors are usually keen to hear about global developments in the sectors in which they invest.’
The time difference between Sydney and major international cities like London (up to eleven hours) and New York (up to 16 hours) can make it tricky to plan a roadshow in Australia. For a start, it means you can really only speak with colleagues back at base at night or very early in the morning. But what’s a few early mornings or late nights if it means a trip to Australia?