Evidence gathered in support of this inquiry made clear the strong presence of institutional investors—especially index and superannuation funds—in the Australian market.
Economies of scale in investment management can produce significant benefits for investors, who may enjoy lower product fees, more efficient exposure to markets, and better net returns.
Index funds have provided an effective means of entry to investment markets for millions of individual investors. The long-term, passive approach employed by index funds has provided investors with low-cost access to sophisticated investment strategies. Furthermore, the broad diversification of portfolios within index funds is more likely to achieve consistent long-term returns and reduce investor exposure to market volatility.
These factors are summarised in Vanguard’s submission, which noted that ‘without index funds and the trend toward low-cost investing, Australian investors would have paid $4.1 billion in additional investment costs since 2005.’
The committee also recognises the role of institutional investors as sources of new capital, which is critical for sustaining the health of the financial system. As the Australian Prudential Regulation Authority has observed, institutional investors are a major source of capital, and they have often played a vital role in maintaining stability in periods of financial stress, such as the Global Financial Crisis and the COVID-19 pandemic.
It appears highly likely that institutional investors will be increasingly prevalent players in future Australian markets. As large institutional investors continue to grow, however, the prevalence of capital concentration and common ownership is also likely to rise.
In this context, it is vital that Australia’s financial regulators are given the resources to monitor emerging phenomena such as common ownership, and are equipped with the regulatory tools to act swiftly should any issues arise. Accordingly, the committee makes a series of recommendations aimed at increasing transparency and enabling better and more active monitoring of Australia’s investment markets in the future.