The Future of Capital Markets The Changing Face of Asset Management May 2012 Representing Schroders: Greg Cooper Chief Executive Officer Schroder Investment Management Australia Limited ABN 22 000 443 274 Australian Financial Services Licence 226473 Level 20 Angel Place, 123 Pitt Street, Sydney NSW 2000
Trends shaping the industry
Consolidation Funds 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Number of Superannuation Funds Retail Public Sector Industry Corporate 2004 2005 2006 2007 2008 2009 2010 2011 Source: APRA, excludes SMSF s
Institutionalisation Bank channels dominate Increasing use of models FOFA discourages freedom 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Retail Super Market Share OnePath BT/Westpac CBA/Colonial NAB/MLC AMP 2006 2009 2011 Source: Plan for Life and CIRA, Sep data points
What will MySuper do? 50 Investment Costs in basis points 40 30 20 10 0 Australia US Canada Europe Global Source: Schroders, CEM Benchmarking, Worlds Lowest Cost Funds
Deleveraging to shape the economic landscape 200 Change in total Debt / GDP (%) 150 100 50 0-50 Japan UK Spain France Italy US Germany Australia Source: Haver Analytics, National Central Banks, McKinsey Global Institute 2000-08 2008-11
Some investment implications Corporate bonds held in inventory by dealers As a % of market capitalization 1 9 8 7 6 5 4 3 2 1 0 2004 2005 2006 2007 2008 2009 2010 2011 High yield secondary trading volume in the US As a % of market capitalization 2 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 2005 2006 2007 2008 2009 2010 2011 1 Sources: Bloomberg, Federal Reserve, BofA Merrill Lynch Research; data through December 2011. Note: Data represent Primary Dealer Holdings of Corporate Bonds >1-year Maturity in the Fed Flow of Funds report. The Federal Reserve Bank of New York's weekly release of primary dealer transactions; the net outright position includes all Corporate securities scheduled for immediate and forward delivery; inventories are expressed as a % of the investment grade and high yield bond market combined 2 Sources: NASD TRACE, BofA Merrill Lynch Research; data through December 2011. Note: TRACE figures are 30-day moving averages of daily high yield secondary trading volumes
The elephant in the room 10% Inflation Adjusted 10 Year Rolling Returns (%p.a.) 9% 8% 7% 6% 5% 4% 3% 2% 1% Objective based target return Australian Median Growth Manager inflation adjusted rolling 10 years return 5% excess Return target 0% -1% Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Source: Schroders. Morningstar Australian Growth Manager. RBA. Net of fees, gross of tax.
What we thought would happen What did happen Efficient Frontier 1980's Efficient Frontier - 1990's and 2000's 19% 10.5% 18% 10.4% 17% 10.4% 16% 80:20 10.3% Return (%p.a.) 15% 14% 13% 12% 40:60 60:40 Return (%p.a.) 10.3% 10.2% 10.2% 10.1% 40:60 60:40 80:20 11% 10.1% 10% 10% 15% 20% 25% Risk - St Dev (% p.a.) 10.0% 6% 8% 10% 12% 14% 16% Risk - St Dev (% p.a.) Source: Schroders. Datastream. ASX 200 and UBS. A Composite index. Actual risk (standard deviation) and return for the period 1 Jan 1980 to 31 Dec 1989 and 1 Jan 1990 to 31 Dec 2010.
The asset management conundrum Positive real returns CPI + 4-5% Over reasonable time frames Fixed asset allocation Peer relative
Traditional model gives volatile results 15% 10 Year Rolling Real Returns 10% 5% 0% -5% 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009 Source: Schroders, Global Financial Data, Balanced fund is 30% global equity, 30% Australian equity, 30% Australian bonds, 10% cash.
Significantly more flexibility required 50% Difference in Asset Allocation from Standard 60/40 40% More Defensive 30% 20% 10% 0% -10% -20% -30% -40% More Growth -50% 1900-09 1910-19 1920-29 1930-39 1940-49 1950-59 1960-69 1970-79 1980-89 1990-99 2000-09 Source: Schroders
Investment Process Fund Impact High Low Objective Fund Strategy Asset Class Strategy Implementation Selection Monitoring CPI+ 70 / 30 Small cap, Large Cap, Active, Passive Benchmark Restrictions Tax XYZ Asset Management Performance vs Benchmark 1,3 yrs Source: Schroders, stylised
How likely is this to continue? % p.a 8 112 Year Real Returns for Equities 7 6 5 4 3 2 1 0 Credit Suisse Global Returns Yearbook, 2012, Real returns from 1 January 1900 to 31 December 2011.
Part of the solution? International Shares Fixed Interest Australian Shares International Shares Alternatives Property Fixed Interest Australian Shares Property Alternatives
Key Industry Trends MySuper and FOFA Reforms Industry consolidation Investment offering Substitution
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