Magellan threatens established fund managers

In a report titled ‘Hedge funds target retail investors’, The Australian Financial Review has highlighted that overseas hedge funds are looking to provide Australian retail investors with access to their products.

And why wouldn’t they? With a superannuation industry that is overly skewed towards equities and high fees it’s a wonder there aren’t already more foreign funds selling their wares in Australia. One positive that could come from this is a more balanced split between domestic and overseas equities than is currently the case.

Up until now there has been a lack of global investment options for investors investing with established managers such as Perpetual (ASX: PPT) and BT Investment Management (ASX: BTT). While Perpetual and BT have made significant steps to improve their global share offering, the nimble internationally focussed investment manager Magellan Financial Group (ASX: MFG) has enjoyed enormous success in recent years growing its funds under management (FUM) from $500 million in 2009 to around $11.4 billion today, as it filled the supply gap and catered to investor demand for exposure to global shares.

Any increased competition from overseas hedge funds is probably of most concern to  smaller unlisted hedge fund managers who are still trying to grow their firms to a sustainable level of FUM. The larger, more established domestic hedge fund firms have solid client bases and long-term track records within the industry and are unlikely to be concerned by new entrants. These firms include the highly regarded Platinum Asset Management (ASX: PTM), which was founded by Kerr Neilsen and currently manages around $17 billion. Along with the smaller K2 Asset Management (ASX: KAM), a Melbourne-based hedge fund manager with around $700 million in FUM and HFA Holdings (ASX: HFA), which is relatively unknown but manages US$7.54 billion in assets.

Foolish takeaway

There have been competitive pressures in financial services for many years, none more so than in funds management. Competitive pressures are unlikely to diminish in the future but that shouldn’t stop outperforming, respectable funds management firms for continuing to prosper.

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Motley Fool contributor Tim McArthur owns shares in Perpetual and BT Investment Management.

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