The dynamics around food are pretty straightforward: there are more and more people to feed, with less and less land available to grow food on. It’s a classic supply and demand imbalance. It is also an investment opportunity – but how to do it?

Until recently, it has been difficult for Australians to play the food industry, whether through soft commodities such as wheat and sugar, or through meat or fish. Oddly for a country that is a major producer of agricultural products and livestock, there are very few major listed companies that are exposed to those themes: the big exception used to be AWB, but in 2010 it was taken over by the Canadian group Agrium. There are still some out there – Goodman Fielder is a big example – but the dominance of the Australian market by banks and resource-linked companies is reflected in a relative paucity of food and agriculture stocks.

Yet the case for food investment is strong from both the long and short term perspective. To start with the bigger picture, the world population is today around seven billion; it only passed the three billion mark in 1960. Moreover, all those people are living longer. The proportion of the world aged over 65 – negligible as recently as the 1950s – is increasing fast. Just under eight people in every 100 on earth are over 65 today, and by 2050, it will be more than 16 in every 100. “The increased size and age of the population means we see additional demands for food, water, resources and everything else,” says Douglas Hansen-Luke, CEO for the Middle East at European fund manager Robeco, known for its work on the so-called megatrends that will shape our world over the coming decades. “It leads to scarcity.”

At a number of points over the last decade, food scarcity has become deeply problematic: there was an incident before the global financial crisis when Bangladesh, for example, was unable to secure rice at international auction because other countries were hoarding their own stocks. Had Bangladesh not had an excellent rice harvest that year, we could have seen severe shortages in a desperately poor country, and associated social unrest. Governments around the world are making food security a priority. “The absence of food security will make it much harder to pursue a broad range of other policy goals,” notes the UK-based Government Office for Science 2011 report on the future of food and farming. “It may also contribute to civil unrest or to failed states; it may stimulate economic migration or fuel international tensions.”

More pragmatically, that shortage suggests an investment case; UBS and Goldman Sachs are among the banks that have argued for a greater allocation towards soft commodities this year. Closer to home, a 2009 report from the Australian Agribusiness Group pointed out that less than 0.01 per cent of superannuation funds went into Australian agriculture, and that a greater proportion – as is common in international pension funds – would have insulated super funds from the global financial crisis. Soft commodities are a long term investment prospect and a diversifier too; and since food is usually a core part of inflation, they work as a hedge.

Shorter term, it’s trickier to be sure about the direction of any commodity in these uncertain times. “It’s not apples and apples,” says Ric Deverell, head of global commodities research at Credit Suisse, and a former Reserve Bank of Australia economist. “There are quite different balances in different markets: corn is fundamentally very tight, while wheat is nowhere near as tight.” But he says “the central tendency in most of these markets will be for markets to move sideways for the next year.”

That said, he says corn is “the tightest market we have seen since the 1970s; when it’s that tight, it only takes small changes in supply and demand to have very large movements in prices.” In that environment, weather patterns, a good or bad crop or some other macro consideration can have a major impact on prices. “If next year is an average season, some of the tension we saw because of crop failures fades away – but gee, it’s vulnerable.” And on top of that, he says the incremental global rate of corn consumption has doubled since 2003, partly because of its use in creating ethanol fuel – 40% of the US corn crop will be used in this way in 2012.

Also relevant are changing patterns in food consumption in emerging markets, and changing attitudes in different countries to self sufficiency. As always, China is a huge driver here: growing use of fish, meat and dairy products in the Chinese diet have had ripple effects all the way to Australian or South American pastoral businesses, while China’s decision to be self-sufficient in wheat and corn has had knock-on effects too – such as in soy, which it is now the biggest importer of, having reduced the amount of soy it grows domestically in order to achieve those wheat and corn ambitions. Clearly, seeing a way through all of these patterns and shift is enormously difficult, but the general long-term trend is up.

So how to play it? Late last year, it became much easier to invest in soft commodities when a series of new exchange-traded funds was launched by BetaShares. Exchange-traded funds behave like a share, in that you buy and sell them on a stock exchange, but they give you exposure to an index or an asset class, and so are a straightforward and low-cost diversifier.

BetaShares launched two new ETFs relevant to food: an agriculture product, and a commodities basket. The agriculture one tracks the performance of the S&P GSCI Agriculture Enhanced Select Index, which is made up of the big four commodities in agriculture: corn, wheat, soybeans and sugar. The commodities basket is broader, covering 24 separate commodities including energy and metals, but it also includes a wider range of food-related commodities: eight agricultural (the big four plus cotton, coffee, Kansas wheat and cocoa) and three livestock (live cattle, feeder cattle, and lean hogs). All of these commodities are established markets with a particularly long trading history in the United States.

Drew Corbett at BetaShares feels the new products fill a gap. “We’re trying to allow people access to different asset classes,” he says. “People have been able to invest in soft commodities overseas for 10 years now through access products [like ETFs], and now people here can access some assets they previously didn’t have a low cost solution to invest in.” He notes that in private portfolios, asset classes such as these can account for up to 10 to 15% of an overall portfolio, and argues retail investors in Australia should be allowed the same opportunity for diversity. And he also agrees with the macro point. “If you look at emerging market population growth, there is going to be substantial demand and pressure on food and agricultural commodities to keep up.”

One point to note about ETFs like this is that unlike a share index ETF, these can’t be backed by the underlying investments. Think about it: you’d have to have a vast warehouse full of corn and wheat that couldn’t be used (or, in the case of the oil ETF, a tanker) to back the fund. Instead, BetaShares backs its ETFs with cash, in order to reduce counterparty risk, a worry in some other ETFs.

CFD providers have watched the emergence of these ETFs with some interest, since they have provided the opportunity for investors to trade soft commodities for years without receiving a huge amount of takeup. At IG Markets, for example, you can trade cocoa (London or US), coffee (robusta or Arabica), orange juice, two kinds of sugar contract, cotton, lumber, oats, corn, soyabeans (including meal and oil), wheat (London, Chicago or milling), rough rice, live and feeder cattle, lean hogs or rapeseed. But, by and large, people don’t. “It’s not one of our most traded products, but more specialised investors will use it – we get a lot of farmers who trade these products, for example,” says Chris Weston at IG Markets.

He argues that anyone who is looking at ETFs should take a look at CFDs first. “CFDs are a much more cost effective way of trading commodities than ETFs,” he says. “They are cheaper, they track the spot or futures price more effectively than an ETF does, and we offer you a price identical to the futures price.” CFDs allow significant leverage, which magnifies both gains and losses.

Anyone who does invest in commodities needs to think about the currency. Commodities are generally quoted in US dollars, and as anyone who’s invested in gold in recent years will know, that can make all the difference if you have made your investment in Aussie dollars. The BetaShares products hedge for the currency. People using CFDs can add a currency hedge in a separate contract if they want to.

In this article we haven’t discussed the tax effective investment schemes that have sprung up around areas like wine, truffles and almonds; schemes like these tend to be used by investors for different reasons, chiefly tax. But in the big picture themes of agriculture and livestock (see box), expect more investment vehicles to emerge.

BOX: Beefing up

Alongside the grains and other soft commodities, a less-invested arm of the commodity world is livestock.

Alongside some of the ETF and CFD investments covered in the main story, a few other ways have been devised for Australians to gain exposure to this asset class.

There is a Beef Stock Market in Roma, Queensland, popular among people in the livestock industry but actually open to anyone with an Australian business number and an internet connection. The market sets a price, per kilo, to buy cattle, and also indicative prices for selling the cattle – one price for when a professional livestock manager suggests it be sold, and one for outside that period. Investors can buy a cow or a herd in this way.

During ownership, investors pay grazing fees – currently $1.15 per kilo gained, paid by direct debit every time your cattle are weighed – and at sale time, there’s an agent’s commission of 4% of the full sale amount, a compulsory industry levy of $5 a head and perhaps additional sales costs including transport to market and weighing. Whatever else is left – the difference between the buy and sell price, based largely on the weight gained in the meantime – goes to the investor.

The market provides this costed example of how it might work. You want to spend about $10,000 on cattle. The purchase price is $2.24 per kilo, and the average weight purchased 254.36 kilos, meaning you buy 16 head of cattle, weighing 4,069.76 kilos, for $9848.82. An invoice goes through for payment within 48 hours. While you own the cattle, every few months they are weighed and the portfolio updated with current weights, while your weight based grazing fee is charged to your account. Let’s say the average weight gain is 195.37 kilos and fees $1.14 a kilo; your grazing fees will be $3,594.81.

Then the livestock manager tells you the animals are in sale condition at an average of 449.73 kilos apiece. If you agree to go at this – the ‘finished sale price’ – the livestock manager goes ahead. Let’s say they sell at $2.22 per kilo, with no additional marketing or transport costs (a farm-gate sale); the portfolio of animals would have been sold for $15,974.41. Once levies, commissions and so forth are taken out, the bottom line is a return of $1,811.80 on your just under $10,000 initial investment, or a return of around 18%, which would have taken about a year to achieve. Clearly, though, there are a lot of unpredictable variables involved; this is just a costed example.

One of the leading producers of sheep and cattle in Australia is Macquarie, which is understood to have about 220,000 cattle and 240,000 sheep across more than three million hectares of land, all of it held as a method of giving investors exposure to Australian livestock. This tends to be the preserve of private or institutional investors; an example of a completed fund backed by Macquarie is Paraway Pastoral, formed in 2007, which runs 18 large-scale sheep and cattle stations across New South Wales, Queensland and the Northern Territory.

While Macquarie declined to comment on any specific funds, citing regulator issues, executive director Tim Hornibrook explains the broader investment case. In some cases, it’s similar to that for other foodstuffs around the world: too many people. “The investment case is a fairly simple one: we’ve got more people in the world eating more food but less land to produce that food on,” he says. “That is causing a structural imbalance between demand and supply, causing a shift in agriculture prices above their long term average. Over the last 40 years arable land available for agricultural production has basically halved. So whereas once upon a time we used to each have a football field we could go and farm on, today we have two fifths of a football field.”

On top of that are changes in what people eat and can afford. “There are not only more people, but those people are getting wealthier, and there is a strong correlation between wealth and diet,” he says. “As you get wealthier, you tend to consume more proteins, and that once again puts pressure on demand and supply.” To meet demand, animals are tending to be produced more intensively – pigs in piggeries, cattle in feed locks – which in turn puts further pressure on the grain and oilseeds used to feed the animals.

But some elements of livestock in Australia are very distinct to this country. “Australia is in a fortunate position,” says Hornibrook. While it ranks second as an exporter of beef globally, behind Brazil, it ranks first by value, “because we get a higher price in recognition of being a consistent provider of high-quality, disease-free meat.” Most cattle in Australia are grass-fed, which is cheaper than the feedlock system common in the US and also considered more humane, and also reduces linkages to rising grain prices. Australia has a lot of land to allow a pasture-based system; it is closer to the key Asian markets than Brazil, with cost and time benefits; and more than anything else, it is disease-free, without ever having suffered an outbreak of an export-restricting disease, a function of being an isolated island with strict quarantine and a national livestock identification system. “Once a cow leaves a farm in Australia it has to wear an electronic ear tag,” he says. “You could be anywhere in the world and order an Australian steak and I could trace it back to the paddock where it was born.”

All of these things make Australian beef (and lamb) a very compelling investment case, but for retail it’s still very hard to play. Macquarie does, though, have a track record of starting out with somewhat esoteric investment classes with institutions and private wealth, then gradually offering retail exposure to them, so that may change in future. In the meantime, the most obvious exposure is through listed companies, the principle example being Australian Agricultural Company, Australia’s biggest exporter of live cattle to Indonesia.

Asia is widely accepted as the most enticing market for asset management growth in the coming decade and beyond. It’s little surprise, then, that the region also hosts a vibrant market for M&A transactions.

This can take a number of forms. One is international businesses seeking to acquire local enterprises, or – where regulation requires – to form joint ventures with them, as is most commonly the case in China. Alternatively, local businesses often acquire one another, or conduct mergers of equals, in order to achieve scale – something that is prominent among the Australian industry funds landscape, for example. Drivers of M&A can include regulatory change and the framework of the institutional investment industry that these fund managers seek to support.

China and Australia dominate M&A in asset management, and China generates by far the most attention.

There are several reasons for this. Firstly, China is obviously the region’s main prize, not so much for the market it represents today but what it is likely to turn into tomorrow. Even after considerable slippage since 2007, the public mutual fund industry in China had RMB2.027 trillion under management at the end of the third quarter, and in brighter economic circumstances is likely to soar. It’s still very clearly an important industry to have a foothold in. Retail mutual funds represent only about 3% of retail investor portfolios, according to research group Z-Ben.

Plenty, though, have already done more than secure footholds. When Essence FMC was established in November, it became the 69^th fund management company active in China. For anyone new seeking to get involved, they must wait for a new licence, and, although six have been established this year (only one of them a JV), it is very hard to know how many more will be licensed and at what pace. A rule of thumb is to wait three years for a new business to be licensed and launched. For foreigners, it can make more sense to find an existing joint venture (there are 36 active) with a foreign partner who wants to exit.

On top of that, regulatory change has driven M&A activity. No domestic fund management company can be 100% owned by one company (although a local company can hold more than 49% in a Sino-foreign JV, in some cases going as high as 80%). Instead, no shareholder can own more than 49% of a domestic fund manager. Consequently many of the bigger local groups have had to sell stakes – either domestically or internationally – and in some cases have opted to change their structure to a JV.

These three trends (potential scale, need to enter an established industry, and regulatory change) are what has made China such fertile ground for M&A.

Perhaps the most striking in 2011 involved China AMC, the biggest local asset manager with almost 10% of all industry assets under management, owned by CITIC Securities. Being the biggest made the China AMC stake difficult to sell, and for some time CITIC found itself in violation of local law because of the size of its shareholding. Eventually, China AMC was banned from new launches until it redressed the problem.

So in 2011, it created five tranches for auction. First, 10% went to Shandong Rural Economy Development and Investment Company, for RMB1.6 billion, and then an 11% stake to South Industry Asset Management Company for RMB1.76 billion. But the most significant sale was the third, in August, since it went to Power Corp, a Canadian financial services firm, for CAD276 million (which at the time was RMB1.78 billion) for a 10% stake. This sale to a foreign house has turned China AMC into another joint venture.

While China AMC, as the biggest, is the most striking example of Chinese M&A, there have been many others besides. Bohai International Trust bought an 18% stake in Orient FMC in 2010, while ICBC announced that Cosco – a shareholder in the ICBC Credit Suisse joint venture – would sell its 20% stake to the bank, with Credit Suisse selling 5 of its 25% stake. The 20% piece cost RMB258.2 million. Southwest Securities, based in Chongqing, bought a 20% stake in Yinhua, another fund management company. Analysts expect other bank-backed JVs, such as CCB Principal, Bank of Communications Schroders and ABC-CA, to see the banks try to up their holdings in future.

The following charts look at the composition of the joint venture businesses in Chinese asset management today.

[Contact Cerulli to see version with charts]

In Australia, one of the main drivers is the pension fund (or superannuation) industry, and in particular industry funds. In an open and highly competitive market for funds, there is a clear need for scale. In early 2011, five separate industry fund mergers were underway simultaneously: First State Super with Health Super, AustralianSuper with Westscheme, LGSuper with City Super, Equip Super with Vision Super, and Non-Government Schools Superannuation Fund with Cue Super. There have been others besides.

While the quest for scale is understandable, it may not always be in the best interests of members. Russell Investments launched a paper in August saying that the cost efficiencies and economies of scale from mergers are not necessarily serving the members of the fund. Issues raised by the paper include ensuring member equity in addressing differing exposure to liquid and illiquid assets between merging funds. Handling varying member balances and managing transparency and accountability principles also raise difficulties. Members are often not given a detailed analysis of expected costs, so can’t then hold their trustees accountable.

Outside these two markets, M&A volumes are lower, but there are several interesting trends underway. India deserves close scrutiny, partly because its own asset management industry has similar demographic potential to China. Here, acquirers of stakes in local businesses, or creators of new joint ventures, have been a widespread group in recent years, from homegrown ambitious businesses like Religare to international heavyweights like Robeco, Nomura, T Rowe Price and most recently Goldman Sachs.

The chart below demonstrates how many of the leaders in international asset management are well represented in ventures of various forms in India today. As with China, a number of different approaches are possible. Some entities carry the name joint venture but are in fact 100% foreign owned, such as those established by Morgan Stanley, Franklin Templeton, ING, HSBC, BNP Paribas, Fidelity and JP Morgan, though the last of those was set up in 2006. Since then, full foreign ownership has also been possible, but they are now termed private sector entities: this approach describes the ventures owned by AIG, Mirae, Daiwa and Goldman Sachs, among others. Still others are true JVs in which the foreign partner ties up with a local, sometimes in a majority stake, sometimes a minority; this is the approach for BlackRock (tied with former Merrill Lynch partner DSP), Sun Life (with Birla), Standard Life (with HDFC), Prudential (with ICICI), and Nomura. Finally groups like T Rowe Price – which holds 26% of a venture called UTI Asset Management – and Robeco and Pioneer (with stakes alongside Canara and Bank of Baroda respectively) have taken a model termed bank-sponsored.

As with China, movements in stakes in these businesses can often be driven by events outside of India. So, for example, Daiwa Asset Management is there not because Daiwa bought in but because it acquired fellow Korean Shinsei Asset Management in 2010. Others change hands because of mergers elsewhere; just as BNP found itself with stakes in three Chinese JVs and was obliged to sell out of two of them following its various financial crisis-era mergers and acquisitions, in India it ended up with two and had to sell its stake in Sundaram BNP Paribas in October 2010.

There is not scope in this article to go into Taiwan and Korea in detail, but both are also important markets for M&A, as the charts below demonstrate.

That’s the backdrop. But should a foreign party acquire a business, or a stake in one, rather than building organically?

There are clear arguments on both sides. It can be extremely hard to launch a greenfield business in many emerging markets. The process of licensing can be opaque and time-consuming, and, once achieved, it is very difficult to start from scratch in an intensely competitive field – none more so than China, but also in established markets like Korea and Taiwan. That’s a clear argument for buying into a business or JV: access to existing client base, infrastructure, and local knowledge, with the opportunity to revamp or improve an existing product range, rather than having to launch and market a whole new one.

On the negative side, it can be frustrating to be the minority partner in a joint venture – and in several markets, China among them, that’s as good as it’s going to get in the near term. There is no opportunity to exercise leadership and to drive the direction of a business. That’s not so much of a problem if the local partner has the right strategy. But no venture ever takes place without some internal friction. Additionally, in competitive markets like China, the costs of acquisition are getting steadily higher, as the China AMC sales show; in a slowing market, no matter how much potential it has, that’s a difficult situation in which to thrive.

Australia’s financial advice industry is going through the greatest period of change in its history. As market participants prepare for a host of new measures that will start to take effect next year, it’s already clear that reforms targeted at superannuation and financial planners will have knock-on effects on the whole distribution sector of the asset management industry.

To recap, three separate streams of reform have been happening together: the Future of Financial Advice (FOFA) reforms on financial planning; the Henry review, which seeks to streamline tax; and the Cooper review, which is a re-evaluation of the country’s powerful superannuation (pension) industry. The FOFA and Cooper reviews, the ones most relevant to fund managers and distributors, have both now reached the point of draft legislation and have undergone detailed periods of consultation and review.

FOFA will be the first to come into effect, largely applying from July 1 2012. Chiefly this affects the way that financial planners are remunerated for their advice, and the way that fund managers and investment platforms reward those planners for distribution. It will, for example, ban commissions from product manufacturers to financial planners in exchange for recommending their products; it will ban volume-based payments; and will introduce a compulsory, annual or bi-annual renewal notice for all advice clients, requiring them to opt in for financial advice rather than it just rolling from year to year.

One argument is that this favours vertically integrated companies – those that, within a single institution, combine product management and a financial advisory force, since they have greater flexibility in how they remunerate. Nomura, for example, argues this favours IOOF Holdings, whose companies and brands include investment management (Perennial Investment Partners, IOOF Multimix), financial advice (Bridges, Ord Minnett, Lonsdale), platform management and distribution (AustChoice, IOOF Pursuit, Spectrum Super) and estate planning and trustee services.

Another argument is that it favours those groups that have long seen the writing on the wall for commissions and removed them from their approach to distribution. MLC, the asset management arm of National Australia Bank, has been taking this approach for about a decade and is therefore well placed for the new environment.

For individual fund managers, the hope is that they will find their way on to the menus of investment platforms based purely on merit and returns, rather than a relationship – however contrived – with a financial planner or distribution arm. One positive way of looking at this is to see how exchange-traded funds, which have never paid commission, have taken off since the advice industry has started to move towards fee-for-service; previously they would rarely be recommended because there was no monetary sense in planners doing so. Any objective view would suggest this is a good thing; ETFs have a useful role to play in a client portfolio but were previously impeded from doing so because of advice remuneration structures. Perhaps the same can happen more broadly with managed funds.

Set against that, there’s still a feeling that this is a move that helps the big get bigger, in terms of distribution platforms; anything that streamlines tends to favour those with scale. The distribution industry has been consolidating for years anyway – there are over 60 platforms in Australia but almost all the business resides within the top 10, and the vast majority the top five.

Within the grass-roots advisory industry itself, though, it’s clear that the changes will have a significant impact. The research group Investment Trends, which this year surveyed almost 1,400 financial planners, found that 45% of them had received soft-dollar benefits from third parties in the last year, and that 16% had received both financial and non-financial incentives to recommend their licensees’ products. The most common soft-dollar benefits may seem rather anodyne – they included professional development (58% of advisers), technical services (43%) and compliance services (22%), compared to just 7% who said they have received cash, gifts or entertainment valued at over A$300 from third parties. But there’s still going to be a significant period of adjustment in the industry model.

There is no shortage of dissenting views in the advice industry about these changes; many feel unfairly targeted, and one particularly controversial element has been a proposed ban on commissions related to insurance in superannuation, with people arguing the ban will discourage people from taking up insurance at all. There is some debate about costs, too; actuaries Rice Warner calculated that the opt-in provisions, for example, would cost $11 per client per year, a calculation widely broadcast by the government in supporting the measures. Rice Warner, which was swiftly belittled by the financial planning industry for understating the cost, has since rushed out a clarification saying this represents the ongoing cost and excludes opt-in implementation costs or any other cost related to FOFA. Its clarification said that a dealer group would on average face $105,000 of one-off costs and $110,000 ongoing per year; and that a product provider would face $1.4 million and $450,000 of costs respectively, bringing an industry total of $46 million in one-off costs followed by $22 million per annum. The $11 figure came from dividing that $22 million figure by the number of people who receive advice every year – estimated at 2 million.

Alongside FOFA, there are potentially more influential changes afoot in the superannuation industry. A previous column has looked at the so-called stronger super reforms; the key measure is the introduction of the MySuper product, which is a low-fee, no-frills superannuation option that will be the default fund for most Australians if they do not specifically opt to be in something else. A host of different MySuper products will be developed by funds, which will come into effect from October 2013, with balances required to be migrated to them by July 2017; they are all likely to look rather similar, offering a balanced portfolio with a lot of the exposure delivered passively in order to keep costs down.

SuperRatings, a research group in Sydney, has estimated that 80% of superannuants fall into the default option, so clearly building a successful MySuper product must be a priority for super funds and the manufacturers they engage. There’s not going to be much room for fees in these things – SuperRatings estimates the average fee will fall to about 1 per cent, whereas many people today pay twice that – but then again the economies of scale should be considerable.

A third change, also highly significant for the funds management industry, is the Superannuation Guarantee (Administration) Amendment Bill, which entered the House of Representatives – one of the two halves of Australia’s parliamentary system – in November. The key measure this will implement, if passed, is to increase the superannuation guarantee (the proportion of salary that an employer must put into super directly for an employee) to 12% from 9% today. This would take place in 0.25 percentage point increments between July 1 2013 and 2020. It will also abolish the age limit for superannuation contributions, again potentially increasing the inflows of assets into the industry.

It’s no surprise that the bodies representing funds are fully behind these changes. The Association of Superannuation Funds of Australia has been swift to urge parliament to pass the legislation. The move would clearly increase retirement savings for most Australian workers – the Treasury reckons a worker aged 30 on A$70,000 a year would have an extra A$108,000 in retirement with the new rate – but it would clearly also boost assets under management in superannuation, which at A$1.3 trillion already represent one of the largest asset pools in the world, all the more so as the Australian dollar continues to climb against the greenback.

ASFA tells Cerulli that each on quarter of a percentage point increase will generate about $1 billion extra in superannuation contributions each year, based on current contributions of about $45 billion a year. So 12% versus 9% means an additional $15 billion per year – or, by 2020, likely $22 billion a year, ASFA says. It estimates that total superannuation assets could increase by 17% of GDP by 2028 as a result of the increase; if that’s right, there will be a total of $450 billion more in assets as a consequence of the rule change.

One interesting impact of all of these reforms is that for many funds and advisors, member retention – particularly at retirement – has become the most pressing issue, more so than engaging new clients in the first place. Some groups will clearly thrive and find new business in this revised environment, but the impression today is of a great urgency for funds and firms to hang on to what they’ve already got.

Where asset markets grow, mutual funds follow. As the CNH, or dim sum, bond market develops around offshore issues in RMB, an increasingly well-diversified asset management industry is taking shape alongside it.

Hard data is difficult to come by, but Asiamoney is aware of almost 30 separate mutual funds or similar investment structures investing mainly in offshore RMB bonds. Already, there is a market with several clearly defined strategies: some focus on credit, others high grade, while some combine bond exposure with deposits and futures, and still others bolster their portfolios with Asian dollar high yield deals which they swap back into RMB.

At one end of the market are the big international names one would expect to see in any new debt market: HSBC, Schroders, UBS, Barclays. Alongside them are a host of home-grown Hong Kong or Chinese names: Haitong, Hang Seng, Citic, Ping An. Some are on their second or third funds. HSBC already has a US$500 million Cayman-domiciled fund, the HSBC RMB Bond Fund, and has just launched a UCITS-compliant fund domiciled in Luxembourg to broaden the reach to a wider audience, particularly clients in Europe. It is launching an RMB currency fund in North America and will look at other structures too. “It’s fair to say that Hong Kong is the home of the offshore RMB, and the home market of HSBC,” says Geoffrey Lunt, director and senior product specialist for fixed income at HSBC Global Asset Management. “For other fund managers this may be a peripheral activity; for us it’s at the very centre of what we do.”

Any discussion about offshore RMB quickly reaches the subject of the supply and demand imbalance: RMB deposits in Hong Kong reached RMB609 billion at the end of August and have at times routinely grown by 10% per month. The need for these assets to be invested in more yield-producing assets has created an imbalance that has, in the past, allowed some very average credit to raise money at very low rates. But every fund manager spoken to by Asiamoney described a relatively easy time allocating the funds they raise, and getting access to the bonds they want.

“We have not had significant trouble investing that money,” says Lunt of HSBC’s $500 million fund. “We are very happy with the way the market has developed and we’ve been able to cope with a lot of the demand we’ve seen for the product.”

Chris Faddy, Head of Distribution at Barclays Capital Fund Solutions for ex-Japan Asia, says fund managers on Barclays’ Renminbi Bond Fund – launched in Singapore in April – have had no problem getting the securities they prefer. “We are extremely aware of the discussion around liquidity,” he says. “However, our experience has been that we have got a full or 80% allocation of every single primary issue we have participated in. The key to participation is relationships: either the fund managers like ourselves that are part of an investment bank, or those with strong relationships with the key brokers, will get the better access.”

Similarly at Singapore’s Fullerton Asset Management, Patrick Yeo says Fullerton’s offshore RMB fund – with US$245 million under management – “could easily go up to $400 or $500 million” without running into problems with allocation. Again, it’s about relationships, he says. “One of our strengths is that we have pretty good relationships with our counterparts,” he says. “Temasek [which owns Fullerton] is an investor in a lot of the Chinese banks such as Bank of China, which is one of the major players in the CNH market, so if they bring in deals and we participate, we tend to get very good allocation.”

And the many local Chinese players report a similar experience. Ben Rudd is executive director and head of overseas investment at Ping An Asset Management (HK), which has seen its RMB fund climb from RMB205 million at inception to RMB1.55 billion, with precisely one day of net redemptions along the way. “Although competition is quite intense in the new issuance market, based on existing relationships with both Chinese and international banks and our strong brand and team, we are normally able to get a high allocation for our issues in primary deals of 80 to 100% of the desired size,” he says in written responses to questions from Asiamoney.

Getting in at the primary market level is crucial, because demand is pushing the secondary markets to much less appealing levels, where there is liquidity at all. “We can’t be buying on the secondary market all the time – that would reduce yield,” says Faddy at Barclays. “The difference between primary and secondary on an issue could be over 1, 1.5%. We picked up Air Liquide on the primary market; those types of securities are trading 100 points under on the secondary market.” That said, secondary market activity is improving; where average ticket size in secondary trading was around $3-5 million at the end of 2010, it is now more like $10-30 million, Rudd says, and in some cases as high as $75 million, a function of increased issuance and the appearance of new trading desks. “Clearly liquidity has surged dramatically for the last nine months,” he says.

There are three reasons concerns about allocation and liquidity have eased. One is that many funds have been smart about the amount of assets they are prepared to accept. “At no stage did we want to compromise our clients by promising too much capacity to them,” says Lunt. “We have been very careful about the growth of our funds in this area.” Faddy makes the same point: “We have been very deliberate in building our asset base slowly. To actively participate in the primary market we need to make sure we don’t grow our assets too quickly.”

Another reason is that the market has now reached a decent size: just over RMB200 billion at the time of writing. It has become reasonably diversified by industry, credit quality and geography – though not yet really by maturity – and this has made life easier for managers trying to pursue a particular strategy rather than just having to buy assets in order to get something. “It has not been too difficult to diversify the portfolio,” says Rudd. With size has come a certain resilience; Lunt notes how encouraging it was to see two-way pricing maintained in the market throughout the recent global volatility. And there’s little reason to expect supply to fade. “In the last few weeks of market disruptions, this [offshore RMB] was one of the few that was effectively still open,” says Suanjin Tan, portfolio manager at Blackrock, which invests in offshore RMB for its regional products and plans to launch a dedicated RMB fund. “We’re quite comfortable with the supply pipeline in this market. The expectation is for RMB30-40 billion in the last quarter of the year: there are lots of Chinese banks, Chinese quasi-sovereigns and multinationals planning to issue.” Others think the figure could be higher.

But the third, and perhaps the most important, is that investor attitudes towards offshore RMB have changed. Where once investors appeared to be prepared to buy anything regardless of cost, quality or investor protection, times have changed, and clearly for the better.

“Initially the market was characterized by some poor quality issuance, given the excess of demand over supply,” says Lunt. “I don’t necessarily mean that the companies were bad, just that the covenants on the bonds were not tight and the yields were far too low, with disclosure below what you would hope for in developed markets.”

Investor patterns have been of particular interest to BlackRock as they prepare their fund. “Most participants looked to the market just for FX appreciation until recently,” says Tan. “There was not a lot of differentiation on the credit quality of companies in the market. But with volatility investors have started to realise that one credit is not necessarily the same as another, and have tried to work out what is the correct premium for that level of risk. That is a very healthy development.”

Changed expectations about currency appreciation are one reason for this shift, but there’s also perhaps a realisation among issuers that they need to pay more for their money in a difficult global environment. “Fund managers like ourselves are more cautious, worrying that if investors get jittery about this market they might pull funds out,” says Yeo at Fullerton. “We are adopting a wait and see attitude. But things have settled down: it’s a matter of issuers coming to terms with having to offer a higher yield to the market.” When Khazanah priced a RMB500 million deal in October, for example, it initially sought to pay a 2% coupon on its three-year deal, but accepted it would have to pay closer to 3% in the end. “When the market started, ICBC was issuing a two year bond at 1.1% and the market was lapping it up,” he says. “That will no longer be the case. Otherwise investors like ourselves are prepared to look away, buy in the Asian dollar space, and switch it back to RMB.”

Fund managers have taken a number of different approaches to the RMB market. Many of the earliest players were local, and these have tended to be more comfortable with credit. Haitong International Asset Management, for example, launched the first RMB fixed income mutual fund in Hong Kong in August 2010, following it with a private placement fund and has announced a dedicated high yield bond fund, with classes in RMB for Hong Kong investors and dollars for overseas, targeting a yearly return of 7-8%. (Haitong did not respond to requests for an update on the fund’s progress before Asiamoney’s deadline.)  Citic Securities International launched a hedge fund structure in this area, the CSI RMB Fund, which takes on multiple strategies including foreign exchange, interest rate and fixed income securities in RMB.  Earlier this year it was talking about 15-20% annual returns, including the currency appreciation; however Citic told Asiamoney it was no longer allowed to talk about the fund for regulatory reasons.

Some internationals have opted to go to the other end of the spectrum and stick with high grade. Barclays is an example: its UCITS-compliant fund will always be investment grade, on average. “There were a lot of funds launched between November 2010 and March of this year, many of them out of Hong Kong from onshore Chinese managers with a presence offshore,” says Faddy. “A lot of them are credit funds, looking to pick the eyes of the high yield market. There was a time when a lot of companies who were finding it difficult to source funding onshore could do so offshore – you could get almost anything you wanted away at a price – and several funds were set up around what was happening in the market at that time. We took a different route.” In his view, the opportunity is among deposit holders who want to get a bit extra without risking the lot. “We are really looking to provide depositors with an alternative,” he says. “Depositors have been attracted to the letters RMB, but the bank deposits carry low rates; the next iteration for those depositors in their investment life cycle will be looking for yield. A high quality portfolio of the bonds is the best alternative for depositors.”

Still others will venture into high yield, but with strict criteria around what they buy. “We would consider any bond that comes on to the market,” says Lunt at HSBC. “There are very good high yield issues available in CNH.”  But “We are absolutely determined not to invest in anything we don’t fully understand. Unrated issuance isn’t necessarily of a lower quality, but it’s very important in this market to have a very strong credit analysis platform and process.”

That will also be the attitude of the BlackRock fund when its new fund arrives. “It’s less that we feel that every high yield issuer is going to face problems; it’s more that there are some names that offer good value, and others that are less compelling,” says Neil Weller, portfolio manager.

Some internationals have taken the approach of mixing RMB bond exposure with other opportunities. In this respect, the UBS RMB Fixed Income Fund is interesting. The fund can only invest in investment grade bonds, and must maintain an average duration below three years. “Based on these two investment restrictions, we can cut down the credit and interest rate risk in the portfolio,” says Ben Yuen, head of fixed income for pan-Asia, at UBS. But against these restrictions, it can put up to 20% of its assets into US dollar Asian investment grade credit, and hedge it back to RMB. “Why? Because the market is quite green, and the universe is small for the offshore RMB bond market.” At the time of writing 18% of the fund’s NAV was used in this way.

Another distinguishing factor is that the fund can invest in RMB deposits, allowing it to invest in futures when they provide a better potential return for the portfolio. This is useful because of the way the market has been behaving: the spread between a five-year government bond in CNH and CNY is about 1.8%, but as recently as July stood at 3.4%. That sort of movement creates opportunities in futures markets.

This approach is helpful when there is high demand for primary securities. “We are not going to force ourselves to invest all our assets in bonds,” says Yuen. “We are holding short term paper to allow us to pick up higher CNH interest rate opportunities in futures. Our short-duration strategy seems quite effective in this market environment.”

Not everyone is sure these arbitrage gyrations are the right place for fund managers to be. “It’s something you’ve got to be very careful with,” says Weller at BlackRock. “The positioning is prone to get very stretched, and at times of illiquidity we’re all aware of what can happen when everyone is positioned the same way around.”

UBS’s approach of allowing some investment in Asian dollar paper is also used at Fullerton. About 25% of the fund is invested in this way. “It gives us a bit of enhanced liquidity, as I the dollar market is more developed,” Yue says. Unlike the UBS product, though, Fullerton can and does invest in high yield, and even unrated bonds; like HSBC, Fullerton assigns a credit rating to any security, and will do so through internal credit work if external ratings are not in place.

The market continues to face teething problems; one widespread complaint is that there is no investable benchmark available. But as the market develops, issues like this will be ironed out. The next characteristic is likely to be a growth in UCITS structures, reflecting increasing demand for these assets progressively further afield from Hong Kong. RMB is, increasingly, a global story.

BOX: RMB and gold

As the offshore RMB bond market has developed, more and more investment classes have grown around it. In October another was added: gold.

The Chinese Gold & Silver Exchange in Hong Kong launched the world’s first offshore RMB-denominated spot gold contract in order to attract some of the RMB circulating outside mainland China. “This product will help with that circulation, rather than the money having to stay in deposits,” says Haywood Cheung, president. Trading has to go through an exchange member – of the 171 members of the exchange, 27 had registered to trade this new contract as of late October – suggesting that initially much of the interest may be from people who physically need the gold, such as goldsmiths and jewelers. That said, there is an electronic platform for trading too, with leverage available of up to 20 times – and the ability to leverage RMB may prove the most attractive element to mainstream investors.

Part of the appeal is that both gold and RMB are perceived as safe investments. “Investors recognize gold as a safe haven, and if the gold is denominated in RMB they are double safe-guarded, because the RMB at this moment is a stable currency,” Cheung says. “It’s a win-win case.”

Over the last three years Australian bonds have done just what people wanted from them – and then some. In a volatile environment they have steadily paid out good returns, have done so reliably, and have in many cases exceeded long-term expectations. While shares have floundered, several of the best bond funds have recorded double digit returns – five of the best are described in detail below.

Is the outlook still good for Aussie bonds or have the best opportunities passed? Like so much else, the answer depends on what’s happening elsewhere in the world. “In the immediate term we’re subject to the vagaries of what’s happening in Europe and the globe,” says Steve Miller, Australian fixed income head at BlackRock. The impact of those developed-world problems on Asia will have major implications for Australia – but if the world continues to turn sour, Australian bonds are better positioned than most. “Australian bond yields are relatively high compared to all other core developed economies,” Miller says. “If the world gets uglier, the Reserve Bank has a lot more room to cut rates; there is room for yields to fall and to provide positive returns to investors.”

Australian bonds are distinct from others in the world for more reasons than just yield. Key benchmarks like the UBS Composite, which most Aussie bond funds follow, are high quality and secure, populated by a high-grade mix of government, semi-government, supranational and corporate securities. Crucially, even the corporate end – usually the riskier end – is very solid in Australia. “Those corporate bonds are generally fairly high quality and are concentrated in banks,” Miller says. “That appeals, because in a world where growth is challenged and banks are deleveraging, the best bonds to be in are high quality and high yielding ones; for Australia-domiciled investors, our bonds offer precisely that.” There are times when that can be difficult for portfolio managers: in happier economic climates they will seek greater diversity in bonds. “But in the world today, it’s favourable.”

Best funds of the last three years

We asked Morningstar to provide details of all Australian bond funds and then selected the five best performers over the three years to September 30, after removing duplicates (for example, the Pimco Australian bond fund can be bought wholesale, or in the retail-accessible version through Equity Trustees; each has slightly different post-fee returns, but is essentially the same fund).

Depending on how you accessed it, the Pimco fund would have brought you between 10.82 and 11.1% per year over the last three years – and it is truly outstanding to have received consistent double-digit returns from an asset most invest in for safety.

The Pimco fund was one of the ones we profiled in last week’s study of bond fund factsheets, so we won’t get into a great deal more detail here except to say that it has made the vast majority of its returns in distributions rather than growth; it is a fairly conservative fund with an average credit quality of AA and an average bond maturity of 5.1 years; and that at the moment it is emphasising government guaranteed bonds, which pay a higher yield than pure government bonds yet are safe and provide liquidity.

Two Aberdeen funds come next on the list. The Aberdeen Income-Focused Bond Fund is, as you would expect, a bond fund focusing on income rather than growth – which is, effectively, what has worked so well for Pimco too. It’s driven by relative value and credit strategies – so it looks to find inefficiencies in the market, where something is valued too low for its fundamentals, and invests in the hope that they will correct themselves so the bonds go up in value. It’s also pretty safe, focusing on government and investment grade securities; Aberdeen ranks its volatility and risk as “low to medium”, which suggests that the funds that have thrived in recent years have actually been the safest ones. Just under 76% of the fund was in top-rated AAA securities as of September 30.

The other Aberdeen fund is the Aberdeen Australian Fixed Income Fund, which is a little more diversified than its sibling. With about half the fund in government and semi-government securities – a lower proportion than the benchmark UBSA Composite Bond Index by more than 10% – it has 37.53% of its money in corporate debt (including banks and asset-backed) as well as 11.75% in cash. 61.58% of this fund is in AAA securities and 16.49% in AA, making it pretty risk-averse, but there is room for a little exposure in riskier, lower-rated securities.

The Perennial Fixed Interest Trust looks very different. As of September 30, only 0.1% of the fund was in government bonds, and 28.7% in semi-governments; instead 49.9% was in credit, such as corporate bonds.  “Solid corporate fundamentals, good levels of profitability and adequate risk premiums for investors make corporate debt an attractive investment option,” said portfolio manager Glenn Feben in his September report to investors. He is also overweight bank guaranteed and semi government bonds, “on the basis of the attractive yield advantage they offer relative to government bonds.”

Rounding out our top five, the Optimix Australian Fixed Interest fund is the only multi-manager product on our list. A complicated story, this one: It invests in a diversified portfolio of Australian fixed interest securities through a range of underlying managers, and until recently did so through ING. However, since the ING business was sold to UBS earlier this month, Optimix is now under UBS – at least until it ends up being owned by ANZ, as many expect, since ANZ owns OnePath, which is the custodian of the Optimix fund. Anyway, at the moment Aberdeen Asset Management and Western Asset Management are the underlying managers, but watch this space.

This won’t be the first time you’ve read that emerging markets are becoming the engines of global growth while North America, Europe and Japan decline. But beyond the broad statements, the evidence is really starting to pile up to prove it.

Consider this. There have been 34 global corporate defaults so far in 2011, according to Standard & Poor’s. 24 of them have been American, three in the European Union, and most of the rest in places like Canada and New Zealand; only one apiece in Israel and Russia could be considered emerging markets. In 2010 there were 49 from the US and 11 from other developed nations compared to seven from every emerging market in the world combined. Fund managers will still tell you that in volatile times, they reduce risk and flee emerging markets – but the truth is, with every passing year, emerging markets become less risky and more like safe havens.

For the moment, capital flows still flood out of places like Asia and Latin America every time there’s a global shock, no matter how illogical that might at first appear. “Asian markets are still peripheral markets for major global institutions,” says Kerry Series, chief investment officer of 8 Investment Partners, an Asia-focused fund manager in Sydney. In the MSCI Developed World Index, for example, Asia Pacific ex-Japan accounts for just 6%, including Australia and New Zealand; beyond Hong Kong and Singapore, every other Asian market is not part of the benchmark many global investors track, “and allocations are likely to be cut when short-term performance pressures occur.” The fact that Asian pension funds and other major institutions are still somewhat in their infancy in Asia and Latin America gives retail investors a bigger role, adding to volatility.

But the long-term story is widely embraced. “We believe emerging markets offer a far superior economic outlook,” says Garry Evans, strategist at HSBC in Hong Kong. HSBC is calling roughly 6% growth in emerging markets this year and next – a cooling, sure, but by comparison, Evans says the developed world is “trapped in a permafrost”. On top of that, while economists had become increasingly concerned by the prospect of inflation in Asia, that concerns has been wiped out for the moment by growth prospects; from Brazil to China, central banks have stopped tightening, with Brazil going so far as to start cutting rates (albeit to a hefty 12%).

Evans agrees that seeing emerging markets assets as risky, and therefore flighty, is wrong. “In many respects, EM assets could be viewed as offering defensive characteristics in the current risk-averse environment,” he says. “Let’s not forget that the current threat to global growth is coming from the sovereign debt crises in the developed world and the associated pressure on its banking system.” He continues to like emerging market equities “for a whole host of reasons such as better demographic trends, more sustainable government fiscal positions, healthier household sector balance-sheet and a likely shift in asset allocations towards the region.”HSBC’s valuation model, called trend-adjusted PE ratio, puts emerging markets at a 9% premium to the rest of the world, “but this is a price worth paying,” he says, noting that HSBC prefers Asia as a region, and in terms of individual markets, likes Taiwan, Russia and China.

Increasingly, emerging markets are not just about the future but the present. Last week [Oct 13] Cap Gemini, with Merrill Lynch Global Wealth Management, released its closely-watched Asia Pacific Wealth Report, which found that Asia had overtaken Europe as the world’s second biggest market of high net worth individuals, measured either by population or combined wealth; on either measure, it’s only a matter of time before it overtakes North America for the top spot.

“Emerging, including Asia, markets are likely to move to substantial valuation premiums to the major developed markets during the next 10 years,” says Series. While developed markets are weighed down by high household and government debt, meaning lower growth as that debt is deleveraged, “the emerging markets, especially Asia, will continue to generate high GDP growth. Investors will pay a premium for growth in a growth-starved world.”

ASIA

In Asia, the big question is just how closely tied the economies and markets will prove to be to global problems. Every time a new period of financial turmoil approaches, the same question arises: will Asia be insulated? Is it different this time? It never is.

But the picture varies from place to place. “Taiwan, Singapore, the Philippines and Malaysia are the economies most leveraged to global growth,” says Wai Ho Leong at Barclays Capital in Singapore. “Higher leverage implies a faster transmission of external growth shocks into domestic demand and employment conditions.” That then feeds through to exports.

On the other side of the coin, the best-positioned Asian economies should be those with strong domestic consumption and diversified exports: Indonesia, India and China. The latter two are covered separately but Indonesia has been the darling of emerging market investment in the last few years: a new but successful democracy, growing foreign exchange reserves, vastly improved fiscal position, a wealth of commodities, and huge domestic growth. The thorn in its side has been inflation – but the latest global shock has pretty much taken care of that. “Inflation appears to have peaked around the region and last week saw initial easing of policy in several countries,” says Series, referring to China, Indonesia and Singapore. “In 2012, it is likely that Asian economies will be in an easing phase as inflation falls and this will be very supportive for Asian equity markets.”

At the recent market low in October, Asian equities ex-Japan had moved to 1.5 times price/book, just 20% above the low of the GFC despite much better profitability now – 14% return on equity compared to 8% in 2009. “The recent sell-off has provided investors with another great opportunity to increase their exposure to Asian equities at low valuations,” Series says. He favours resource and domestic Asian consumption stocks.

CHINA

“If investors thought China could save the world back in 2008, they now think China just might sink with it.” So says Steven Sun, head of China equity strategy at HSBC.

This is a perennial question not just for investors with exposure in China, but anywhere in the world, so crucial is China’s strength to the world economy now. Hard landing or soft? Inflation problems or not? The markets certainly haven’t liked what they’ve been seeing, as Chinese equity markets lost 30% in the third quarter of the year.

Many people believe it is cheap. By early October China (through the MSCI index) was the cheapest stock market in Asia, trading at 1.4 times 2010 price to book ratios – almost 10% lower than the market bottom in 2008 – and seven times 12-month forward price-earnings ratios. “The sell-off is overdone, in our view,” says Sun. He also notes that financials, industrials and materials have sold off by about 60% versus their five-year averages, compared to just 20% for consumer and IT stocks. “This shows us what may be the real driver of future growth in China: consumption.”

A key question revolves around inflation, and last week [Oct 14] CPI eased to 6.1% year on year, with analysts expecting continued moderation. This has a big impact on monetary policy, and therefore conditions for growth. “As inflationary indicators continue to ease, the government will likely pause on its tightening campaign,” says Jing Ulrich, chairman of global markets for China at JP Morgan. “In the remainder of this year, policy focus will shift to maintaining steady GDP growth and employment,” among other things.

It’s important to note that most people with China exposure aren’t actually buying domestically-listed Chinese shares, or A-shares; instead the more common way is to buy those shares that are listed in Hong Kong, called H-shares (if the company is Chinese) or red chips (if it is legally a Hong Kong company but almost all of its money comes from China). Today, funds available in Australia – and there are several, from names as big as Fidelity and Aberdeen – usually invest in H-shares, while the ASX-listed investment company from AMP holds A-shares.

INDIA

Last month Russell Investment chief investment strategist for Asia Pacific, Andrew Pease, argued that India was the most compelling market for investors considering investing in Asia. “The relatively attractive valuation, combined with the easing of inflation pressures, peaking in the tightening cycle and India’s defensive characteristics heading into a global slowdown, put this market at the top of our list,” he said.

Well, if it was an attractive entry level then, it’s more so now; the BSE 30 index, which tracks the 30 biggest stocks listed in Mumbai, fell just over 8% in three weeks in September, and has not yet regained the lost ground.

India is partly a demographic story, like China: the two of them combined have three times the population of the entire developed world. It is, more than anywhere else, a story of potential, with per capita GDP of just $1,500 today despite unarguably becoming a world power.

Corruption and governance are big issues, as are slow progress in bringing about vital infrastructure development; additionally it has the highest percentage level of debt of the big emerging economies (though well short of debt-laden developed world nations like Japan) and has constant challenges with inflation. Short-term, some are bearish: Nomura expects real GDP growth to remain below potential [it was 7.7% year on year in the second quarter of 2010, which sounds pretty good anywhere else but represents a decline in India) and is calling 7.9% growth in 2012, though on the brighter side it expects headline inflation to drop from 9.8% (August) to below 7% by March.

But the sense of India finding its place in the modern world is exhilarating, and the long-term possibilities are enormous. “Economic indicators are not uniformly flashing red,” says Taimur Baig, economist at Deutsche Bank. “Tax collection and trade data suggest steady economic growth. The economy remains on a better footing than it was in 2008.”

Examples of India-specific funds sold in Australia are from Fidelity and Fiducian.

EEMEA

This clumsy abbreviation stands for Eastern Europe, Middle East and Africa – which basically means lumping together a load of places that don’t really fit anywhere else. South Africa has about as much in common with Poland or Qatar as Tony Abbott does with Mahatma Ghandi, but nevertheless these nations do tend to be treated as a group by global fund managers and by big multilateral institutions such as the World Bank.

Clearly each part of the group needs to be considered separately. Emerging market funds from Australia will only tend to have exposure to a few of these places; the Aberdeen Emerging Opportunities Fund, for example, has only one stock (the Turkish bank Akbank) from this region in its top 10, while Templeton’s Emerging Markets fund gets its exposure from Russian energy and commodity plays like Lukoil and Gazprom. Russia, as a BRIC member, attracts a lot of attention, while other countries in this region that attract funds include South Africa (which offers a combination of high rates, a relatively well developed local bond market, and good fundamentals), the Eastern European members of the EU (particularly the longest-standing ones: Poland, Czech Republic and Hungary), and – at least until recently – Egypt, one of the oldest and deepest stock markets in the region.

The Gulf is an odd part of the world in market terms. Economies like Saudi Arabia and Kuwait would normally be expected to be big parts of international capital markets, seeing as they are so rich and replete with hydrocarbon wealth. But their markets are not sufficiently open to be included in international indices like the MSCI Emerging Markets index, so index providers still class them as frontier, meaning a lot of capital can’t go near them.

This was all meant to change this year, as Qatar and the UAE had been given a clear indication that if they made certain structural reforms, they would be bumped up to emerging markets, meaning that a lot of fund managers who track the index would have had to put money there – a first step towards a much more investable Middle East. But MSCI has delayed its decision until December 2011, because while both markets did make changes, they have not yet really gone far enough, particularly on foreign ownership limits (still just 25% in Qatar).

LATIN AMERICA

For most investors, Latin America chiefly means Brazil and Mexico. Examples of popular holdings include oil and gas group Petrobras (though it battered investors with a huge rights issue from which the share price has yet to recover), Brazilian mining group Vale (formerly CVRD), the beverage group AmBev (the Latin American arm of Anheuser-Busch), the Brazilian banking group Itau Unibanco (formed in 2008 by two of the country’s biggest banks; its competitor, Banco Bradesco, is also popular), and the Mexican beverage group Fomento Economico Mexicano (also known as FEMSA).

Brazil, Latin America’s representative in BRIC, attracts attention not only because of the outlook for its stocks but its currency and its extremely high rates (12% even after a rate cut). “We would suggest investing in high-yielding countries with solid fundamentals,” says the Blackrock Investment Institute in a study released last month. “In particular, we recommend focusing on countries that offer positive real rates – returns adjusted for inflation. In Latin America, real rates are higher, particularly in Mexico and Brazil.”

In difficult economic times, investors tend to show more interest in bonds: safe, stable, steady, and not generally subject to the same volatility as stock markets.

There is a multitude of bond funds available in Australia: domestic and international, simple and structured, high grade and high yield. So how does one choose between them?

To explain, let’s take a close look at some of the available information for major bond funds sold in Australia. To start with, take the fact sheet issued by PIMCO EQT Australian Bond Fund. Pimco is one of the world’s biggest fixed income managers, and its fund is sold to retail investors in Australia through Equity Trustees; you can get its latest fund factsheet from the Equity Trustees site (www.eqt.com.au).

At the time of writing, the most recent fact sheet covers the period to September 30 2011. Right at the top, it tells you the basics of the fund: its investment objective, the sort of things it invests in, the date it started, the management costs, funds under management (Pimco calls this investment pool size), minimum initial investment, and the buy/sell spreads on the fund when you buy in or sell out. All of these things may be relevant to you in deciding whether to invest in a fund: perhaps the amount you want to invest is below the minimum accepted, or the management costs are higher than you’re comfortable with.

What’s particularly appealing about the Pimco fact sheet is that it tells you not only the fund’s return, but where it’s coming from. A bond fund will get returns from two sources: distributions, from the bonds it holds, and growth in the value of the bonds themselves. Pimco breaks these down, and also compares them to the index, so you can see how it’s doing compared to its benchmark. Over the last year, that makes rather solemn reading for Pimco, though you can see it is beating the benchmark over the longer term.

Another interesting part of the Pimco factsheet is the way it breaks down the funds by duration, yield and quality. It is very important to understand that all bonds are not equal – indeed, they are as different from one another as stocks are. The highest rated bonds in the world are rated AAA (such as Australian government bonds – but not, any more, US Treasuries) and they then fall one notch at a time as the strength of the issuer falls. AAA is better than AA, which is better than A, and between each of these classes is a plus and a minus to provide further differentiation (so AAA- is one notch above AA+). BBB is considered the lowest level of what fund managers call investment grade; by the time you get to BB, you’re in to what is variously called sub-investment grade, high yield, or junk. Here, you’re getting big returns, but at a much higher risk.

Bonds also vary enormously in duration, from periods that can be measured in days (these are normally called money market securities) up to as much as 100 years, though in practice most bond funds will tend to focus in durations between one and 20 years. Pimco’s fund, for example, has an average maturity of 5.1 years, and an average asset quality of AA. We can also see the estimated yield of the portfolio (6.5%), which should give us some guidance about expected returns. Pimco goes so far as to provide a chart of when the portfolio matures, and what sectors it is typically in.

Pimco’s is a fairly safe and steady fund – just 3% of its holdings are sub-investment grade, while 81% are AA or higher. So for comparison let’s look at something with a different risk profile. The Schroder Credit Securities Fund is sold in Australia (directly as a wholesale fund, but you can access it through platforms) and its fact sheet can be found on the schroders.com web site. A look at the latest factsheet (August 2011, at the time of writing) shows a markedly different range of credit ratings: only 9.5% of holdings are AAA, compared to the majority in the Pimco fund, while more than 20% are sub-investment grade, and some rated as low as CCC. Additionally, although this fund has two thirds of its assets in Australian securities, it can invest in global assets too, so shows regional allocations, top holdings, and the split in bond type.

In a fund like this it’s easier to see just how widely fixed income securities can vary from one another. This fund puts 36% of its money into hybrids and convertibles, which are a sort of halfway house between debt and equity: for example, they might start out as bonds but in certain circumstances convert into shares. Australia has long been fertile ground for these securities, and a look at the top 10 holdings shows many of them, from issuers like Orica, Woolworths and Southern Cross Airports. Like many funds, the Schroders product offers a monthly commentary on how risk assets are doing, what was added to or taken away from the portfolio in the previous month, and what the outlook is; many people find this a very appealing consideration when deciding whether to invest. Incidentally, while the mix of holdings in the fund is very different between the Pimco and Schroder funds, the experience has been similar: outperforming the benchmark in periods over one year, underperforming more recently.

Monthly reports like these tell you a lot about a fund and help you to make a decision on whether it’s right for you. Of course, look at returns – and focus on the long-term end of that chart – but also be clear on the level of risk, the expected time horizon, where the money is coming from, if it is heavily concentrated, and generally if you understand what it does. If all those things tick the right boxes for you, you’re probably going to be a happier investor going in.

BOX: What’s it mean?

DURATION: Each bond matures in a certain period of time; generally, for any one issuer, the longer the duration, the higher the rate of interest. Average duration gives you a snapshot of the whole fund’s holdings.

CREDIT RATING: Most bonds are rated by an agency such as Standard & Poor’s, Moody’s or Fitch. These ratings are meant to reflect the ability of a borrower to pay back the bond: AAA is the strongest, and below BBB you’re into what’s called junk territory. A fund should tell you the split of credit ratings among its holdings.

YIELD: Some managers will express a yield for their entire portfolio – the expected return assuming the bonds in the portfolio stay the same and continue to do what they’re meant to.

Australia’s fund management industry is gearing up for a major change to the superannuation system – one of the largest pension fund pools in the world, with over A$1.3 trillion under management. From 2013, a new default fund format called MySuper will become the norm – a low-cost, no-frills fund that people will be automatically put into if they make no other selection.

MySuper is one of the biggest outcomes of the Cooper Review, a comprehensive study of the superannuation industry which was released in July 2010 and carried 177 detailed recommendations (another outcome was Superstream, which simplifies back office processes). The driver behind it is simplification in order to reduce fees. As Prime Minister Julia Gillard put it in her open letter to the nation explaining the policy: “Every dollar diverted in fees or other unnecessary overheads is a dollar less going towards a larger and more secure retirement.”

A MySuper product will have no entry fees, exit fees limited to cost recovery, no hidden fees or commissions, a single investment strategy set by the trustee, standardised reporting, and a duty requiring super fund providers to deliver value for money or lose their licence. Fund trustees will have to apply for a separate licence from the Australian Prudential Regulatory Authority (APRA) in order to offer a MySuper product.

But what does it mean for super funds, and underlying fund managers? Super funds will still be able to offer a range of different products, and won’t have to offer a MySuper product, but if they don’t, then nothing they offer will be eligible to operate as a default fund. In other words, people would have to make an active choice to move their money to them. People can still opt for self-managed super funds, or anything else they currently use; MySuper is all about the people who don’t make a choice or express a preference.

But there’s still plenty we don’t know for sure. The government has conducted a period of consultation, now closed, in which industry participants have had a chance to voice concerns and suggestions, but we do not yet have an announcement on the outcome of that consultation period. For example, in draft suggestions, the Australian Treasury (the equivalent of a finance ministry in most countries) says every MySuper product will have to have a single diversified investment option, but that the government will consider allowing trustees to offer a life cycle, or life stage, investment strategy as that option. That would mean allowing the trustee to automatically alter the investment asset allocation of members based on their estimated number of years to retirement, with higher risk and higher growth strategies early in a client’s life, and more conservative strategy based on preservation closer to retirement. It remains to be seen if that strategy survives the consultation process.

For underlying managers, one relevant element will be new standards around the payment of performance fees to fund managers – again, something that is undergoing consultation now. In consultation documents, the Treasury noted that performance fees are argued to align interests of members, trustee and investment manager, but also said it had concerns with the current structure of performance fees, such as inappropriate hurdle rates “that result in payment of performance fees for average performance.” One of the issues the Treasury asked for feedback on was whether to apply a principles-based or prescriptive approach in setting performance fee standards – but whatever form they take, change is clearly coming.

The prize is great. As of March 2011, there were A$1.357 trillion in Australian superannuation assets under management, including $370.3 billion of retail-offer superannuation funds (which, in their own right, represent 65% of the entire retail fund marketplace). According to APRA, 44.9% of superannuation funds were in default strategies as of June 2010; if that remains consistent, then MySuper products are going to represent half the market and many hundreds of billions of dollars of assets.

At the same time, though, they’re also going to reduce the profitability of super funds (not all of which exist to generate a profit, but many – the commercial funds from backers like Colonial First State, BT or AMP – most certainly do) and potentially of underlying fund managers too. The emphasis in Australian superannuation today is the constant squeezing of costs and fees; if that’s happening at the super fund trustee level then it’s also going to be passed down the chain in mandates they give to managers.

It’s likely, though, that some super funds will seek to differentiate themselves based on quality, hoping to demonstrate that by paying a bit more in fees, clients can expect better returns. Most will offer a range of options: existing funds, and a MySuper compliant vehicle, as the assets at stake are too big to contemplate not launching such a product at all.

The changes are unlikely to make much difference to distribution, since MySuper is all about people who don’t seek out an avenue to invest in the first place. For super trustees, their immediate priority will be to hang on to the assets they’ve already got, firstly so that people who don’t express a choice can stay in their default product, and secondly so that they don’t witness a period of outflows to better-marketed or better-performing other products. It should be said that people can certainly make a choice to enter a MySuper product, and in an era in which fees are being painted as rather bad things, that may well be a popular approach. In that respect, we can expect a period of intense marketing from super funds, just as we did when the ‘choice of super’ initiative was implemented and many industry funds were opened to anyone who wanted to invest in them for the first time.

One group quite likely to benefit is passive managers such as Vanguard, since any attempt to keep fees low and strategies simple invites the prospect of an index-based exposure to various asset classes for a large part of the fund. We could, too, see fund trustees using ETFs for some of their exposure – whether by directly purchasing them on the stock market, or through a mandate that behaves a lot like an ETF. Logically high-fee, high-conviction products should lose out, although it may well be that trustees find a core-satellite approach cost-effective, with passive allocations for most of the fund and some more active mandates around the edges to generate a bit of lift.

Having published its various consultation papers in March, the Treasury is now working through the submissions; Minister for Financial Services and Superannuation Bill Shorten is expected to make an announcement in coming weeks, with the final terms and conditions of MySuper expected to be clear by the end of the year. Then there will be a clear starting line for fund trustees and fund managers to start getting ready for 2013 – one of the biggest ever changes in one of the most powerful pools of capital in the world.

International investors are wrestling with timing over emerging market investment. Most  believe emerging markets offer the greatest opportunity in world investment today, but those markets continue to be hit by volatile reversals in light of problems in the developed world.

“I would expect emerging markets to sell off – not necessarily because their fundamentals have come off, but because the big demand for emerging markets is from crossover investors,” said John Cleary, CEO and CIO of emerging market-focused hedge fund Focus Capital. But he said he was “buying into the selloffs in equities. If you look at valuations, they are at near five to eight year average lows. There are really compelling valuation stories, growing domestic consumption and changing trade patterns.” On the debt side, he said he expected “increased allocation to emerging market debt, there’s no doubt about that.”

This sense of short term declines but long term value is prevalent across the investment community.  “In the short term emerging markets – both debt and equity – are vulnerable to further weakness in advanced countries,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors. “This is being reflected in cautious capital flows to them. However over the medium term, the absence of debt problems and stronger growth potential indicate that emerging markets are the way to go for investors.”

The more common view is that debt will enjoy revived flows before equities. “In fixed income, capital flows in Asia have been more consistent than in equities, and positive,” said Neeraj Seth, managing director and head of Asian credit at Blackrock. “I believe over the long term that will continue. The only risk is in the short to medium term: There could be small patches of reversal, as you are seeing now, and that’s something you’ve got to be mindful about.

“I would still be positive in the long term for Asian debt, especially for countries with good growth and strong and improving sovereign balance sheets.”

But strategists argued that investors will need to see a clear floor in declines before they return en masse, suggesting we may see further outflows before the longer-term trend of capital movements towards Asia return. “There are only two reasons for any investor to look to pick the bottom in the emerging market world now: confidence that the emerging market economies will survive the global downturn, and that rate cuts would be forthcoming,” said Woon Khien Chia, strategist at RBS in Singapore. “The assumption here is that there would not be a repeat of a global banking crisis a la Lehman, which is a very strong assumption at this juncture. There is no clarity now on how the Greek debacle will eventually unfold. Hence, we may see more sell-off before the smart money returns to the emerging markets world.”

Timing this return will be crucial to the investment management industry. “Emerging markets have cheapened, and are pricing in more of a global crisis, but it is a moving target: it’s like a dog chasing its own tail,” said Pablo Goldberg, head of emerging market research at HSBC, adding he would “certainly back fixed income, net equities.”

Cleary added: “To a degree, I think a big part of the panic and flight to cash has already happened. The overriding sense is that investors are comfortable with increasing their allocations to emerging markets despite the volatility. Asia is not immune, but it is far more resilient than it was in the past.”

Longer-term, there seems little doubt that enthusiasm for emerging markets will resume. The Blackrock Investment Institute said last week that emerging markets represent 86% of the world’s population, 75% of its land mass and resources, but just 12% of global equity market capitalization. “The emerging markets’ share of world financial assets will increase materially over the next decade,” it said.

Australians are having a hard time with investment at the moment: it’s been a directionless, rudderless market without much consensus on what’s likely to happen next. Where will European sovereign debt problems, US growth worries and Chinese inflation leave world or local markets? There’s uncertainty in every asset class, be it local or global equities, bonds, property, currencies or commodities.

For many of the businesses that serve Australian investors, there’s a mixed picture that comes from this. Some institutions are thriving: notably CFD providers and FX platforms. For others, particularly those based around straightforward equities, business tends to be a little quieter.

At BT Wrap, for example, which was chosen by judges Rice Warner Actuaries as the nation’s leading investment platform, market share is increasing but the overall pie is not getting bigger at its usual rate. “It’s a very soft trading environment,” says John Shuttleworth, general manager for platforms, marketing and communication at BT. “If you look at the total market, annual flows over the last 12 months were about $10 billion. To put that into context, if you look at a normalised year taking out the peaks and troughs you’ve normally got about $30 billion. The market is running at one third of the usual new money flowing in.”

This doesn’t apply to superannuation money so much, since the state requires that 9% of earnings go into super regardless of the market. “Our business has been fairly consistent,” says Justin Delaney, head of platforms at Macquarie, whose Macquarie Wrap Super and Pension Manager was named the best superannuation platform in the industry. “We are certainly seeing an increasing level of flows towards super versus vanilla investment options. Super is still growing well, and at a better rate than the pure investment market.” It’s in the discretionary area where people still don’t seem to be comfortable in putting their money to work. “Post-GFC, a lot of people are still sitting in cash,” says Shuttleworth. “We have on our platform cash solutions as well as managed funds, so we can see a high level of people staying in defensive asset classes, driven by the volatility in the markets.”

Which platforms thrive in this environment? Rice Warner liked BT for its comprehensiveness, in terms of its investment menu, features, terms and conditions, alongside competitive fees. And it felt Macquarie had the most extensive list of investment options, again accompanied by strong features and terms such as flexible client servicing facilities, excellent capital gains tax management functionality, and tailored facilities for superannuation needs (enabling clients to split insurance between super and non-super, for example).

Managers themselves see other important elements in the mix. “What’s driven our success is that we’ve got a very strong distribution base, with some high quality dealer groups who have been supporting us for a number of years,” says Shuttleworth. In that respect, being owned by Westpac, and therefore with close links to St George and Asgard, is clearly helpful. “You need good, strong distribution, and to secure that you’ve got to continually invest in the platform to make sure it has the best features and functionality in the market.” Nick Bowley, national product manager for BT Wrap, agrees: “There’s lots of competition out there, but those who invest and deliver are the ones that are successful.” Specifically, BT Wrap has bolstered its equities capability, and has seen the asset class climb from 10% of its funds under administration to 16% by making the process for managing equities – which is a lot harder than managing managed funds – more efficient. Other initiatives have included building model portfolios for advisers, enabling them to combine equities and managed funds; and bulk trading functionality, when advisers need to buy and sell in large volume to rebalance client portfolios quickly.

Delaney attributes Macquarie’s success to “a good combination of rich functionality, good service and competitive administration fees.” Distribution has been important for Macquarie too, but in a different way. “We are really here to support the boutique market in particular,” he says – that is, boutique advisers and independent financial planners who will advise you on your superannuation and then seek a platform to help them implement what they want to do.

Both BT and Macquarie are known for the range of their investment menus; BT has almost 700 managed funds as well as all ASX listed securities; Macquarie, which also offers ASX securities, has 580 funds on its menus. But is there a point when you can have too many options? “It’s that breadth you need to have in order to cater for advisers and dealer groups using the product,” Bowley says. “There are various levels of sophistication, such as the high net worth space, so you need a breadth of investment products.” Shuttleworth adds that dealer groups, who have their own research teams, will create approved products lists from those investment menus that might be much smaller. Delaney at Macquarie adds: “We don’t see our role in managing the menu as being making a selection. We make sure funds meet our requirements, but whether it’s 600 or 200 comes down to adviser demand and what they believe they need for their clients.”

Both groups have also sought to make sure that the growth of self-managed super funds is a source of opportunity rather than just a threat. Delaney says Macquarie gets a lot of SMSF business into its investment wrap, in which a client will have the independence of a self-managed fund, but will still use a wrap platform as the vehicle for running the fund. BT Wrap has also tried to tailor some of its services to this group.

[SUBHEAD: The crowded broking field]

For those who seek to invest directly in equities through a broker, there is a greater range of choice than ever before. We award three prizes within this field: the fully-featured online broker, the low-cost online broker, and the traditional non-advisory phone broker.

CMC Markets, our winner in the low-cost category, gave the market a shakeup last August when it dropped its headline brokerage rate to $9.90 per trade, by some distance the lowest in the market. It had an instant impact: E*Trade swiftly dropped its own rates, for example. The policy had a very quick impact for CMC, which only had a 3% market share a year ago and is growing swiftly. Moreover, CMC has attracted very active traders, who have accounted for most of the new business – meaning that turnover at CMC is up 40% in a year.

“We’re tuned into what active traders want,” says Louis Cooper, head of CMC Markets. “They are very price sensitive, and the more they trade, brokerage becomes a far bigger aspect of their trading, in terms of what it takes away from their profits.”

While CMC markets itself hard on its low cost – “we’re here to say investors have had a raw deal for many years, and we have proven you can run a very profitable business at a low price point,” Cooper says – they are also keen to point out that low-cost doesn’t mean low-service. “Just having a low price point is not enough for active traders,” he says. “We have not in any way shape or form reduced our price point at the expense of the functionality for our customers.” For example, CMC offers free unlimited conditional orders, free dynamic charting, and very fast order processing. It also offers education packages in order to attract new traders as well as the active ones.

Westpac won our fully-featured online broking category; like its BT Wrap sister, it has seen trading volumes soften yet has increased market share. One of the reasons it has been able to do so is by building out the capability of the platform, which allows customers to trade equities, options, CFDs and other securities both domestically and internationally off a single platform, aided by a host of news and research services, and practical assets such as a linked cash account.

Do people need all the bells and whistles? “International is a good example,” says James Staltari at Westpac Online Broking. “It is only used by a segment of our customer base, and not by the masses. But it’s important to have that full suite. The self-directed market is continuing to grow at a rapid pace, and our research shows that while not everyone uses all the services, it’s important for them to have everything available on a single platform so they don’t have to open another account with a different organisation.”

The Westpac model involves standard and advanced research packages, with the advanced one offered free of charge to anyone who trades two or more times a month. News feeds cover a host of sources from Reuters and Dow Jones to more specialist providers like Morningstar and Lexus Nexus, or homegrown Westpac Economic Research and fund manager Advance. Frequent videos, updated through the day, offering insights on financial markets, are proving increasingly popular. At the same time, efforts are made to make life easier: Westpac’s mobile phone application is growing exponentially, Staltari says, allowing people to buy and sell, access research and manage their portfolio on their handhelds. “We are seeing month on month double digit growth.”

And there’s still a role for phone broking, a category in which First Prudential took the prize. “First Prudential provides significantly lower cost trading over the phone when compared to its competitors across several trade scenarios,” says Infochoice, our judges in this category.

Almost everyone interviewed in these features talked about the potential for regulatory change, particularly around the provision of advice, and few areas have faced greater regulatory and tax uncertainty than margin lending in recent years. “It has been an interesting year for lenders of margin loan products,” says Sean Doolan, head of Suncorp Margin Lending, which won our margin lender category. For a start, several business processes have had to change since January 1 following the newly introduced Margin Lending Regulations. “This has seen a substantial change in the application and assessment process compared to days gone past,” he says. Then there’s the way Australians view debt in the wake of the financial crisis. “The margin lending industry as a whole has had its challenges, largely tied to Australians being more conservative with their debt and risk levels due to economic uncertainty,” he says. And on top of that, there’s the state of the markets. “Our local market has failed to provide motivation to increase loan-to value ratios back towards pre-GFC levels. Customers are maintaining their current positions but ongoing economic uncertainty and the GFC hangover is still impacting their risk tolerance levels.”

Despite that, Suncorp reports an increasing number of new customers attracted by low interest rates in order to take advantage of buying opportunities. It’s just a question of people becoming convinced that it’s safe to go back into the water. “The market is arguably undervalued in some areas, but while uncertainty about the economic conditions across Europe, the US and our own multi-speed economy continue, we expect this cautious approach to play out a bit longer before confidence returns more broadly to drive industry growth.”

Across the board, the trend everyone remarks upon is the shift towards self-direction: people taking control, doing their own thing, taking responsibility for their own investments. In a recent Suncorp survey, more than 70% of Australian shareholders said they were making their own trading decisions rather than relying on the advice of a stockbroker. “The control and confidence that customers feel they have from managing their investments will also influence the performance of the market,” Doolan says. And this is going to define the way the industry develops from here: serving people like you who want to take charge.

Breakout: CFDs and Forex

Whilst most investors struggle with market volatility, for some people it’s good news. CFD providers, for example, thrive in these conditions.

“Market volatility is a big driver for us,” says Tamas Szabo, CEO for Australia at IG Markets. IG in Australia has enjoyed growth in all its key metrics: new client takeup and client activity.

“When we see volatile markets, people generally trade shares a lot less and tend to trade indices, commodities and FX a lot more heavily,” says Szabo. “Our commodity business has overtaken our overall share volumes recently, and that’s never happened before.” Where shares used to be dominant for IG Markets, today they are less than 20% of the business. And since indices, commodities and FX are mainly not that easy to track for individual investors, much of this business has flown to CFD providers.

It has helped that commodities have either been soaring through market turmoil (gold), or have behaved with intense volatility that has allowed smart traders to take advantage (silver). “CFDs give clients opportunities to take advantage of market movements – and the trend is towards markets moving rapidly, rather than not doing an awful lot,” Szabo says.

Most clients still use CFDs for short term speculation, but it appears more and more are using them for hedging and risk management purposes generally; it’s hard for providers to know exactly how their clients are using the product. So what differentiates a good CFD provider? “Reputation and financial strength,” says Szabo. “With some high profile cases of financial providers getting into difficulty, this is focused on a lot more heavily. People need to understand the risks of the product and the provider – what happens to their money when they place it on deposit?” IG Markets, which is listed (in the UK) and therefore transparent as well as large, has benefited from this scrutiny, and it never uses client funds for its own hedging activity. On top of that, it has a very wide range of available investments.

Foreign exchange providers, too, appear to be thriving because of volatile markets. “Volatility can have a significant effect on driving trading volumes, which continue to run at elevated levels,” says David Morrison, derivatives market strategist at GFT. “While volatility in equity markets has been subdued recently, it has spiked higher in commodity and currency markets.” The uncertainty around sovereign debt, and the outlook for global growth, have “kept investors and speculators on their toes,” he says. And in his view, it’s going to stay that way, with sovereigns having assumed the bad debts that nearly destroyed the banking system, and policymakers facing a great challenge in steering the right path. “Consequently, we expect the financial markets to remain volatile, and this should continue to drive up trading volumes.”

GFT’s approach is to provide software, education and services allowing customers to trade quickly, efficiently and securely, through its DealBook software. All told, across offices worldwide, it has a client base covering 120 countries; as with IG Markets, the scale and global reach appear to reassure investors. “Increased regulation across the globe is aimed at weeding out bucket shops and creating more legitimacy for the end user,” says Kathy Lien, director of global research and analysis.

Lien expects forex to remain in the minds of Australian customers. “Interest in forex trading remains strong and the volatility in currency values will keep FX rates in focus,” she says.

Boxes

Fully Featured Online Broker

Westpac Securities

Features and fees:

Online brokerage of $19.95. Frequent trader discounts, dynamic market information, international share trading, cash management account. Market depth: 100.

What the judges say:

Westpac Securities’ brokerage package possesses plenty of bells and whistles for investors and outscored the competition across both features and pricing.

Cheapest Online Broker

CMC Markets

Features and fees: $9.95 for online brokerage. Also allows free stop losses.

What the judges say:

For the average investor the cheapest way to buy or sell shares online is through CMC Markets which offered the lowest rates for a variety of trade scenarios.

Cheapest Non-Advisory Phone Broker

First Prudential Markets

Features and fees: Average price for a $5,000 or $10,000 trade: $14.95.

What the judges say:

First Prudential provides significantly lower cost trading over the phone when compared to its competitors across several trade scenarios.

Margin Loan

Suncorp

Features and fees: Variable rates 8.99%-9.24%; short term fixed rate 8.6%-8.85%; long term fixed rate 7.7%-9.6%. Features include 5% share buffer, interest paid on credit funds, and portfolio management.

What the judges say:

Suncorp’s rates and pricing across a range of tiers consistently outperformed its rivals throughout the year, offering investors a cost effective margin lending solution.

CFDs

IG Markets

Features and fees: 147 Australian shares with margin rates less than 10%; $8 minimum ticket charge; share financing of 2.5%; live ASX data, at a cost of $37.50; guaranteed stop loss, international shares, gold, oil, treasuries, economic research, and company profiles.

What the judges say:

IG Markets offers CFD investors extensive platform features, trading and risk management tools at one of the lowest costs in the market.

Forex

GFT

Features and fees: Spreads from 0.8 in most major cross rates. 129 pairs offered. Dealer desk.

What the judges say:

GFT outscored its rivals by providing one of the lowest spreads on key currency pairs, a full set of features, and flexible trading options.

Platform of the year – Investment

Platform of the Year – Super

Macquarie Wrap Super and Pension Manager

What the judges say

This product offered the most comprehensive list of investment options amongst the submissions received. This extensive range of options is complemented by its wide range of features, terms and conditions. These include flexible client servicing facilities, excellent capital gains tax management functionality and useful facilities tailored to suit clients’ superannuation needs such as enabling clients to split insurance between super and non-super.