Australia's seductive thriftiness; FUNDS; MARKETPLACE by Bloomberg

FINANCE; Pg. 18

Kevin Foley - Bloomberg News

SYDNEY

Australian mutual fund assets have more than doubled in the past four years, making the country one of the world's largest markets for fund management.

And that is attracting overseas money managers who had previously ignored the country, despite the savings potential of its 20 million citizens.

Fifteen years after the start of a mandatory retirement savings program, Australians are the biggest fund investors in the world, holding an average of 48,178 Australian dollars, or $38,802, each, according to the Australian Finance Group.

Total assets rose to $763 billion from $356 billion in the three and a half years to June 30, according to data from the Investment Company Institute in Washington.

''All that money simply cannot be invested in Australia,'' said Alan McFarlane, managing director of Walter Scott & Partners in Edinburgh, which oversees more than 3 billion dollars for Australian investors. ''That makes Australia one of the most attractive markets on this planet for global equity mandates.''

Australia in 1992 shifted the burden for pensions to a savings program funded by employer and worker contributions. Fueled by those savings and rising commodity prices, Australia's S&P/ASX 200 stock index rose 72 percent in the three years ended Dec. 31, almost triple the gain of the Standard & Poor's 500-stock index.
Australia retains a tax-funded national pension plan as a safety net.

Mandated pension payments by employers, which began at 3 percent of employee wages, rose to 9 percent in 2002. While most countries have about 45 percent of workers in retirement plans, Australia has 95 percent, said Justin Wood, chief executive of Barclays
Global Investors in Australia.

Voluntary contributions to retirement plans may increase this year, since the government plans to scrap a 15 percent tax on lump-sum payouts to people aged 60 and over.

Retirement savings by Australians would rise an additional 20 percent to 2.14 trillion Australian dollars by 2020 if the tax were abolished, said Jeff Warner, a director of Rice Warner Actuaries in Sydney.

''Ending the tax will have a dramatic impact on growth of retirement savings,'' said Warwick Negus, chief executive of Colonial First State Global Asset Management in Sydney, the largest money manager in the country. Colonial teamed with Acadian Asset Management of Boston in 2005 to run stock investments.

By 2015, Australia will account for more than half of all retirement savings in the Asia-Pacific region, according to Dorothee Franzen, the head of pension research at Allianz in Munich.

Such projections have attracted international attention.

In 2005, President George W. Bush of the United States proposed including Australian-style retirement savings accounts in the U.S. Social Security program, claiming they would help avoid tax increases. The plan stalled in the face of opposition from the Democratic party.

Retirement savings accounts have also led to increased international investing by Australians. At the end of last year, almost 28 percent of mutual fund assets were invested overseas, up from 7.6 percent in 1988, according to the Australian Bureau of Statistics.

Pension trustees, appointed by companies to manage their employee savings programs, offer a selection of funds, most of which include international options.

''There is a huge weight of money trying to get set in areas where there is insufficient domestic supply,'' said Simon Eagleton of Mercer Investment Consulting in Sydney.
Strong demand does not mean all new entrants will succeed in a market still dominated by domestic managers, who make up five of the top eight firms, ranked by assets under management.

BT Financial Group, for example, which oversees 40 billion dollars in Sydney, fired Putnam Investments of Boston last year after Putnam's International Core Equity Fund trailed the benchmark MSCI Europe, Australasia and Far East index in the previous one-year, three-year and five-year periods.

''It's a crowded market,'' said Erich Gerth, chief executive of Janus Capital International, a unit of Janus Capital Group in Denver, whichopened an office in Melbourne last month.

''You can't just fly in and assume that people will be lining up to do business with you.''

Such concerns have not held back Walter Scott & Partners. Macquarie Bank, the biggest
Australian investment bank, chose the Scottish firm to help manage international stocks for its clients. Walter Scott returned 12.3 percent a year in the decade through 2005, beating the 8 percent gain for the MSCI world index.

''The Macquarie initiative fits like a tailor-made suit,'' McFarlane said. ''It was exactly what we were looking for, without needing to open an office in Australia.''

March 27, 2007