Domestic Business Review
The Australian business had a strong year with funds under management (FUM) experiencing strong growth driven by a record year in net inflows. This is a particularly pleasing outcome as the business over the past few years has focused on building revenue streams from new products and investment capabilities combined with a targeted distribution strategy. In line with the Group strategy, we also broadened our investment capabilities, establishing a new Global Equities team.
As a result of a number of initiatives the Australian business achieved its highest level of net inflows since listing in 2007, despite tough market conditions. Total net inflows of $2.6 billion, excluding legacy funds, was driven by strong institutional flows of $2.3 billion, with a further $0.5 billion from the wholesale channel.
FUM grew to a record $44.1 billion, up 10 percent on last year, due to net inflows and positive market returns point to point. This is a strong result considering the market was on average five percent lower than last year, as measured by the S&P/ASX 300 index.
Fixed income maintained its growth momentum with FUM increasing by 24 percent to $6.8 billion, compared to last year. Net inflows of $1.3 billion included funds from new institutional mandates. Funds attracting the highest inflows included BT Wholesale Fixed Interest Fund and BT Wholesale Monthly Income Plus Fund.
Australian equities grew FUM by 12 percent to $13.0 billion, with net flows of $0.3 billion into its core funds from both institutional and wholesale channels. Funds attracting the highest net inflows included BT Wholesale Mid Cap Fund and BT Wholesale Focus Australian Share Fund.
Diversified’s FUM fell slightly to $11.7 billion, down two percent, due to outflow of the legacy book. However, it received net inflows into its BT Wholesale Plus funds, which included two new extension strategies launched during the year.
We continue to see positive flows to our ethical and sustainable products, such as BT Wholesale Ethical Share Fund, in line with the increasing demand for responsible investment products in the Australian market. Total FUM for these funds has been growing 15 percent per annum on average over the last three years, reaching $2.1 billion at the end of the 2016 Financial Year.
We maintain a long term focus on achieving investment performance for our clients and notwithstanding some weaker short term performance, our three and five year track record remains strong. Over three years, 78 percent of FUM outperformed the relative benchmarks. However, the Australian market remained volatile, impacted by offshore events and significant outperformance of asset based yield stocks where valuations have expanded beyond what we would deem reasonable. Consequently one year outperformance was lower, with 25 percent of FUM outperforming the relative benchmarks. Further information on our investment capabilities is provided in this Annual Report, starting on page 20.
Our strategy is focused on developing growth opportunities through expanding our investment capabilities and enhancing our distribution channels and client relationships. A key part of our strategy is attracting and retaining investment talent that adds value to the management of our clients’ portfolios.
This year we expanded our investment capabilities, adding a new Global Equities team focused on serving the Australian retail market. Ashley Pittard joined BTIM (Australia) as head of a new Global Equities boutique, bringing 19 years of investment experience in managing global equities. With the launch of the BT Global Concentrated Share Fund in August, the strategy adds to our position in global equities in what is a fast growing asset class in the Australian market.
Revenue growth from new products continues to grow and since 2011 the business has now raised $6.6 billion in FUM from new initiatives. This has gone a significant way to offset the decline in the legacy book. These initiatives include the launch of a number of new income funds, fixed income strategies, emerging market strategy, significant investor visa products, SMAs and a range of new diversified funds all of which have contributed to growth in FUM.
We continue to build on our distribution channels to drive demand for our products and our initiative to expand our reach to the high net worth market is now seeing regular flows into a number of products from that channel. This year a broad range of our equities and fixed income products were added to BT Financial Group’s new Panorama platform. We also extended the availability of some of our products on a number of other platforms, providing access to new clients.
During the year there were important developments in the regulation of our industry that directly impacted our business. We put in place resources and management focus to assess, develop and implement the requisite policy and operational changes. This provided us with the opportunity to further enhance our regulatory framework.
The three key regulations and reforms impacting the operation of the business were:
- Over the Counter (OTC) derivatives reform
- updated Regulatory Guide 97 (RG97) on enhanced disclosure fee reporting and
- Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) legislative amendments and impacts relating to management of AML/CTF obligations arising from the Westpac sell-down of its shareholding in BTIM Group.
The OTC derivatives reform, which will take effect in calendar 2017, will bring significant changes to the way the industry reports, clears and executes OTC derivatives transactions. This reform aims to enhance the transparency of these transactions in the market, promoting financial stability and preventing market abuse. We have commenced preparations for the changes and have dedicated additional internal resources and management to design and implement the changes and controls around this reform.
The business also commenced preparations for implementing the updated RG97, another industry wide regulatory reform. RG97 provides guidance on meeting enhanced disclosure regulations and reforms when disclosing fees and costs in our Product Disclosure Statements (PDS) and periodic statements, which must be in place by February 2017 and January 2018 respectively.
As part of the Westpac Group sell-down of its shareholding in BTIM last year, we established a standalone AML/CTF Program, a transition from being part of the Westpac Program. AML/CTF is an Australian legislative requirement that applies to all BTIM business activities that involve the provision of designated services as specified under the AML/CTF Act 2006. We developed an AML/CTF Program as required under the Act and have implemented relevant appropriate risk-based systems and controls to identify, manage and mitigate the money laundering and terror financing risks we may reasonably face in providing designated financial services to our clients.
With the establishment of the Global Executive Committee, we also added to the leadership of the Australian business. As covered in the Group CEO’s Report, Michael Bargholz joined BTIM in October 2016 as Chief Executive Officer, BTIM (Australia) a new role with direct responsibility for the leadership and management of the Australian business.
Nicola Scott, who joined BTIM in May 2016, was appointed to the new role of Chief Financial Officer, BTIM (Australia), created following the elevation of Cameron Williamson to the Group CFO role. Nicola is responsible for the Australian business financial operations and reporting and reports to the Group CFO. The Australian business leadership team remains strong with the existing members continuing in their roles.
Our people are our biggest asset and we continue to invest in the development of our leaders and general staff through leadership programs, support for industry specific professional accreditations and the introduction of an intern program to promote greater gender equality in the industry. Underpinning all of this is the importance of maintaining the long term trust of our clients and providing an inclusive and supportive environment that is built on trust and integrity.