The way these funds are managed in Australia, she says, needs to catch up with the vast amounts of money involved. But it will require bold moves by successive governments that until now have been happy to tinker around the edges or carry out “legislation by press release”.

The overly complex regulatory and taxation environment, she argues, is stifling a returns bonanza for Australia’s financial services industries, and the businesses it invests in. And this is set to be compounded by new laws that would increase compulsory superannuation to 15 per cent.

Kendall says less than half of the $3.4 trillion of funds under management in Australia is invested offshore and this is shaping up as the next big challenge for an industry that is in desperate need of investment diversification.

“A jump from 9 per cent to 15 per cent in super will swell the Australian pot and intensify the hunt for high quality investment opportunities,” Kendall says.

“Access to private markets is key once a fund is fully deployed in listed equities, and that comes with scale. The small funds can’t compete. Regulatory tinkering, without the courage to make bold moves and big changes, is resulting in lost opportunities for Australian money investing offshore and inbound money looking to invest here.”

Anomalous investment structure

At the core of the problem are tax requirements that are out of step with international norms. With the Australian Tax Office unable to let income flow through limited partnerships (the vehicle used by private equity or funds management in the rest of the world), Australia has an anomalous investment structure.

“The ATO taxes those entities as if they’re a company which means there’s a layer of tax that’s unexpected by international investors,” she says. “Our whole industry sits in trusts which makes them hard to sell to overseas investors and makes it hard for overseas managers to come here and do business because it’s such an unusual regime. Less than five per cent of funds under management in Australia come from overseas investors, which is a crying shame. Australian companies, innovators and entrepreneurs are missing out.”

So what could the ATO and the Foreign Investment Review Board (FIRB) do to reduce red tape and support the growth of the funds industry?

“I would really love to see a simple tax transparent limited partnership that isn’t subject to widely held restrictions,” she says. “I think the tax environment here is much more complicated than it needs to be.

“We could lean a lot harder on the source rules for taxing Australian source income and worry a lot less about trying to put everyone on the same footing as the local super industry.”

Cut-price mergers

Allowing superannuation funds to merge at a much lower cost to their members would also be a step in the right direction, she says. Typically, at the moment, because the system is set up with trusts rather than entities that have their own legal personality, trustees have to move the legal title of every asset.

For fund managers, it can mean ordeal by Excel spreadsheet.

“I’ve been involved in a fund transition that moved $65 billion of assets in a weekend,” Kendall says. “This involved more than a million lines of transactions.”

Some decisive regulation around this challenge would reduce the high cost to members of superannuation fund mergers and help the funds in their quest for access to diversified investment portfolios.

According to Ross Stephens, director and superannuation specialist at KPMG, the compliance costs for super funds investing offshore remain a disincentive.

“I don’t know how you would cure that necessarily because it’s not like there’s special laws just for super funds, these are the same laws that apply to everyone else that invests offshore,” he says.

While super funds might be preparing for a changed tax landscape, Stephens say this is unlikely to happen in the near term.

“The CFC (controlled foreign companies) regime has been around since 1992 and there has been talk of a complete carve out for lower taxed entities like super funds but that has never happened, it’s only ever been recommended in different papers that have gone up to government over the years.

“The government has shown, at different times, some appetite for that but I suspect in the present revenue climate the likelihood of it being adopted is pretty low.”

Kendall argues there needs to be a wholesale shift of focus by governments which have been locked on to reducing super fund costs rather than driving returns; a case, she says, of “the tail wagging the dog”.

“Overall the landscape in Australia is strong and quite optimistic, we remain somewhat sheltered from what has been happening in the United States.”

Kendall says in the current environment, wholesale fund investors have gone into soft pedal mode while they assess the market.

“There’s probably a flight to safety with some chief investment officers having chilled on some of the more marginal investment bets.”

“Last year there was almost a giddiness in the market, but that’s not the case anymore. But funds are still being raised and we have the fourth largest pension fund market in the world and that can’t just be put on ice whilst the market settles down.”