Fund growth outstrips supply

THE growth in Australia’s fund management market is outstripping the supply of new equity, resulting in some share prices being inflated.

Rothschild fund manager Andrew Brown said this year the lowest level of new equity hit the market for a long time, meaning there was not enough new supply in Australia to soak up the relentless demand.

“So what you have is a lot of funds managers chasing the same old stock and in some cases they come and chase them up to share prices, that we at Rothschild think are pretty ridiculous,” Mr Brown said.

Over the past few years the total market capitalisation has increased by about 5 per cent to 6 per cent a year.

“Over per cent and the market starts to choke a bit. This year it has to little to absorb,” he said.

An Assirt Research survey shows the industry grew to $607 billion in the June quarter.

The funds remained in the hands of a few with 61 per cent of managed assets with the top 10 managers – up slightly from 60 per cent in March, while they accounted for 96 per cent of the industry net funds flows for the quarter. Net inflows were up 7 per cent on the corresponding period last year.

With further mergers, a surge in share buybacks and a drop in new listings, the situation is placing some local companies in healthy situations regardless of their true value.

“The market is paying far too much for some of the really strong growth companies such as CSL and Computershare. But they (managers) are tending to neglect companies that have had some adverse earnings surprises and tend to mark them down to prices that are just silly,” Mr Brown said.

Merrill Lynch retail business managing director David Skelton said there was a shortage of fresh ideas hitting the market.

When there is a fresh idea, managed funds often embrace it.

Mr Brown said this helped explain the flood of interest in the recent initial public offering of Billabong shares that ended up about 10 times oversubscribed.

“What you are getting is what we call a quick rotation. This is when there is a new idea about and the money that is thrown at it is quite significant and the price moves up quite significantly,” Mr Brown said.

Mr Skelton said the pure weight of money coming into managed funds each year might cause many managers to increase their overseas exposure.

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