The growth of the funds management sector in Australia over the past decade has repeatedly been flagged as a key factor that could lead to an increase in common ownership of Australian publicly listed companies by domestic institutional investors. The committee acknowledges this as an area requiring closer scrutiny.
Growing funds management sector
Over the past decade the Australian funds management sector has grown by over 75 per cent in real terms, with the consolidated assets of managed funds valued at $3.3 trillion as at 31 March 2021. This figure is the equivalent of about 144 per cent of the market capitalisation of all companies listed on the Australian Securities Exchange (ASX), or 174 per cent of Australia’s nominal gross domestic product (GDP) over the year to 31 March 2021.
Breaking down the ownership of securities listed on the ASX, the Australian Competition and Consumer Commission (ACCC) submission explained that:
As at 31 March 2021, domestic institutional investors were estimated to own just over half of the value of Australian listed equities. Foreign investors (including overseas based institutional investors) were estimated to own approximately one third of the value of listed equities, while households directly own about 11%. Of domestic institutional investors, superannuation funds are the largest owners of Australian listed equities, followed by managed funds.
The increase in institutional ownership of Australian listed companies has been driven by changes in how individuals and businesses invest in publicly listed companies. Over the past three decades, the Australian Parliament has directed money from households into compulsory superannuation contributions. This had enabled large pools of money to be managed by few people. The diversification strategies of these funds mean that they tend to own large swathes of an entire market across a number of firms. Further, when combined with the number of retail investors, some of the funds, if they were to coordinate their actions, would have effective control over some very large Australian companies.
Over this period, passively managed funds (such as index and superannuation funds) have exhibited particularly strong growth.
According to the ACCC, the collective ownership interest of three major foreign-owned fund managers—Vanguard, BlackRock and State Street—was estimated to have represented 14 per cent of the issued capital of ASX200 companies in 2019. While in the superannuation sector, the value of Australian listed equities owned by superannuation funds that are regulated by the Australian Prudential Regulatory Authority (APRA) grew by 50 per cent between September 2012 and March 2021. The value of Australian listed equities owned by those funds in March 2021 was $467 billion.
Furthermore, the superannuation industry in Australia is projected to continue to grow substantially. Treasury informed the committee that, as at 30 June 2021, the superannuation system had assets under management valued at around 160 per cent of GDP. This value is projected to grow to around 244 per cent of GDP by 30 June 2061.
The inflow of money into superannuation funds and the need for that money to be invested has contributed to the increased ownership of publicly listed companies by superannuation funds. As at June 2021, APRA-regulated superannuation funds’ holdings of listed equities represented approximately 20 per cent of the market capitalisation of all ASX listed companies.
In the superannuation sector, the increase in the concentration of ownership of listed companies has been further driven in recent years by funds shifting to managing more of their investment ‘in house,’ as opposed to outsourcing that function to other investment managers. Equally influential has been the drive towards mergers of superannuation funds, with the aim of ensuring that they have sufficient scale to compete.
The increasingly concentrated ownership of listed equities is likely to lead to greater potential for the simultaneous ownership of shares in competing companies by institutional investors.
Understanding the level of common ownership
The committee does not agree with the ACCC’s submission that it is difficult to draw conclusions as to how common ownership is affecting market competition in Australia.
The ACCC notes that at present there is a limit to understanding the level of institutional ownership in individual listed Australian companies. This is in part, the ACCC claims, because the relevant provisions of the Corporations Act 2001 only require investors to disclose their shareholdings if they and their associated entities own at least 5 per cent of voting shares in a company (with additional disclosure required with each movement of 1 per cent).
The Australian threshold is:
the same as that in the United States, Hong Kong, the European Union countries and New Zealand (all have 5 per cent thresholds); and
within the range of thresholds in the United Kingdom and Canada (3 and 10 per cent respectively).
Another factor mentioned by the ACCC is the use of nominee holding companies, whereby the nominee company is listed on the share register (as opposed to the investors being listed). The identity of the investors is only required to be disclosed if they exceed the 5 per cent statutory threshold for notification.
Expanding on this, Westpac outlined to the committee the process of establishing the identity of investors:
… while you see a lot of nominees on the share registry holding large numbers—say, an HSBC nominee legally would appear as the largest shareholder in Westpac—they’re holding on behalf of other companies. Then you’ve got to go a couple of levels down to work out who’s voting the shares. So beneficial ownership could be held by one particular company, but a super fund, say, might outsource the management to another fund manager but hold the voting rights. So there are a couple of steps in the process to work out who’s voting shares, as opposed to the beneficial ownership.
This complexity affects our ability to understand and monitor the scale of common ownership. In their submission to the inquiry, Associate Professor Martin Schmalz and Thomas Reyntjens of the University of Oxford noted that:
Data on who holds shares in which Australian companies is patchy, like in many other countries. This makes it difficult to comment on the extent of common ownership in Australia. Researchers need to rely on a combination of databases that require time-consuming reconciliation and data cleaning.
This point was further emphasised in a submission by Assistant Professor Jenifer Varzaly of Durham University Law School:
The … area that I would suggest we need to know more about is in relation to beneficial share ownership within Australian publicly listed companies. For example, a registry which systematically provides this information would be useful to have in Australia, given that such information can increase the effectiveness of subsequent policy and regulatory strategies. Indeed, understanding the parameters of beneficial share ownership (e.g. in terms of ultimate identities, geographic locations, degree of controlling interest etc.) will assist our understanding of the key regulatory challenges arising from the increase in common share ownership observed.
In appearing before the committee, Dean Paatsch of Ownership Matters—a proxy and governance risk advisor to institutional investors—reflected on the current access to ownership data in Australia:
… there is the public declaration of shareholder interests and the threshold of five per cent, either acting in concert with someone else or in and of themselves. Below that level, the nominee holders have a list of who the beneficial owners are, but that can be difficult to access.
… that register is almost unusable to the general public. Companies, particularly large companies, know who their beneficial owners are. They put out tracing notices under the Corporations Act to require nominees to deliver up those lists. But if you're a punter who walks in off the street to inspect that register—and I've done it—it's almost unusable.
… It’s very expensive, and it’s very disorganised.
This lack of transparency within the share register and access to comprehensive data is an impediment to research into various phenomena, including common ownership. Some researchers have proposed that a possible consequence of this lack of transparency is that current levels of common ownership in Australia are likely to be underestimated.
In response to the current lack of comprehensive data about common ownership, the committee explored with witnesses the appetite for introducing a beneficial ownership register and a reduction in the threshold for reporting beneficial ownership below the current 5 per cent.
The introduction of a requirement similar to the so-called 13F disclosure rule imposed by the US Securities and Exchange Commission (SEC) was also considered.
The 13F disclosure rule is a quarterly report that must be filed by all institutional investment managers with at least $100 million in assets under management. The report is filed within 45 days of the conclusion of each quarter. Introduced in 1975 by the US Congress, the 13F disclosure rule was designed to increase transparency of information pertaining to the securities holdings of institutional investors. US lawmakers believed that this institutional disclosure program would increase investor confidence in the integrity of the securities market.
While witnesses were supportive of greater transparency, some also expressed concern about the potential impact of burdening businesses with additional regulation. The Australian Securities and Investments Commission (ASIC) noted, for example, that there would be a cost to reducing the substantial shareholding threshold below 5 per cent. In addition, Westpac and National Australia Bank (NAB) expressed reservations about establishing a beneficial ownership register, with Westpac suggesting such a measure might be particularly onerous.
In a similar vein, BlackRock argued that:
Any law reform based on an idea still subject to rigorous debate, is in our view, premature and inconsistent with the approach taken overseas. Further, this would abruptly impose direct costs and restrictions on Australians and their savings for an unproven consumer or market outcome.
Accordingly, while the committee is conscious of the importance of greater transparency, it is cognisant that over-regulation is likely to exacerbate existing programs rather than solve them. Thus, the committee, after careful consideration, does not support the introduction of a beneficial ownership register nor a reduction in the threshold for reporting beneficial ownership below the current 5 per cent.
While recognising the need not to overburden investors with regulatory requirements, the committee believes that there may be merit in increasing information disclosure by major investors. Accordingly, the committee recommends that the Australian government considers a requirement for portfolio managers whose assets surpass a particular threshold to report their shareholdings on a quarterly or annual basis, similar to the 13F disclosure rule that operates in the United States.
This inquiry has highlighted the significant growth of the funds management sector in Australia over the past decade, and the projected rise of large investment funds.
The committee recommends that the Australian government considers a requirement for portfolio managers whose assets surpass a particular threshold to report their shareholdings on a quarterly or annual basis, similar to the 13F disclosure rule introduced by the Securities and Exchange Commission in the United States.