ric battellino : challenges and opportunities for the funds management industry in australia opening remarks by mr ric battellino, deputy governor of the reserve bank of australia, to the 20th australasian finance and banking conference, sydney, 12 december 2007. * * * introduction it is a pleasure to be here to open the 20th australasian finance and banking conference. over the past twenty years, the conference has provided a stimulating forum for discussion of a wide range of issues facing the banking and finance industry, and it has played an important role in helping to promote australia as a major financial centre. i ’ m sure this year will be no exception. this morning ’ s business forum on the challenges and opportunities for the funds management industry has already generated a number of interesting points for discussion. the schedule for the next two and a half days will take the discussion into a broader range of topics in the field of banking and finance but for the moment i will focus my remarks on the funds management industry. industry size let me begin by recapping some facts on the size and growth of the industry. as we have heard, the funds management industry in australia has expanded at a remarkable pace over the past couple of decades. since 1990, the value of funds under management has grown at an annualised rate of 12½ per cent, and now stands at around $ 1. 7 trillion. this is equivalent to about 160 per cent of gdp, up from about 50 per cent in 1990. by international standards, australia ’ s funds management industry is among the largest in the world, not only as a ratio to gdp but also in absolute terms. some reports rank australia as the fourth largest funds management industry in the world in terms of assets under management. the data underlying this ranking are compiled by the investment company institute, an industry association for us mutual funds. this measure covers investments in mutual funds and unit trusts, and therefore favours countries such as australia where this type of investment vehicle is quite common. on the other hand, it understates the size of the funds management industry in countries that tend to use other investment structures. an alternative approach for measuring the size of the funds management industry is to add up all of the assets of pension funds, life insurance companies and other managed investments, regardless of the precise legal structure in which they reside. this provides a broader view of the funds management industry and one that is more comparable across countries. this exercise is not straightforward, however, as consistent international data are difficult

to obtain. after taking into account some of these measurement issues, my colleagues at the bank estimate that the australian industry is among the world ’ s ten largest, though more likely towards the bottom of this group than in the top half. it is difficult to be more precise than this but, nonetheless, it is clear that the australian funds management industry is large by international standards. reasons for growth what has been behind this rapid expansion in the industry? a large part of the growth over the past couple of decades has been due to superannuation. superannuation fund assets have grown by an average of 14½ per cent per annum since 1990, and now comprise about half the funds under management in australia. this rise in superannuation assets reflects a number of government initiatives, such as the introduction of compulsory superannuation contributions in the early 1990s and the concessional taxation of superannuation. other parts of the funds management industry, however, have also grown quickly, reflecting more general reasons such as the increased financial awareness of households and the associated search for higher returns than those offered by traditional investments such as bank deposits ; the strength of world equity markets ; and the demographic trend of “ baby boomers ” entering the wealth - accumulation phase of their lives. as well as investing in what might be considered to be fairly conventional financial products, it is also notable that in australia there has been significant direct participation by retail investors in the markets for sophisticated financial products. for example, retail and high net worth investors account for about two - thirds of the assets of australian - based hedge funds, compared with less than half globally. the available evidence for australia also suggests a larger retail presence in the market for collateralised debt obligations than is the case in other markets. over the past five years, retail investors are estimated to have purchased around 15 per cent of the cdos issued in australia. one of the reasons for this higher participation by australian retail investors in these markets is that the regulatory regime in australia does not restrict retail access to any financial products as long as the provider meets certain disclosure requirements. this approach has been beneficial in terms of providing investors with a greater range of wealth - generating opportunities, but it does raise some important challenges. i want to spend the rest of my time today outlining these and other challenges facing the funds management industry. challenges one of the most important challenges raised by a disclosure - based regime is that it places a significant premium on financial literacy. this is because it relies heavily on the ability