BT's performance worth crowing about
One of the sleeper issues in this season's bank results will be the contribution from their wealth management business, which only a year ago were the divisions that none wanted to highlight.
Wednesday's performance from Westpac's funds management offshoot, BT Investment Management, was worthy of a crow. Cash net profit for the half to March 31 was up a whopping 73 per cent and it is now making as much as it was before the global financial crisis.
Only a year ago some banks - in particular NAB and ANZ - were under some pressure to write down the value of their wealth assets but insisted they needed more opportunity to turn them around based on the notion that they could cross-sell wealth management products to their retail and small business client base.
To date, there is no real evidence this strategy has been successful. For more than 10 years this multi-product approach has been held up as the nirvana that would enable them to capture a larger share of savings. But it hasn't worked.
In large part the success of BT over the past six months has been the result of the surge in world equity markets.
When equity markets are hot two things drive wealth management business. Funds under management naturally increase because shares go up and, second, people move money into these funds because they recognise the previous point.
Thus management fees increase and so do performance fees, so there is plenty of leverage in this business.
While this has been the BT experience, the group can also claim better success in cross-selling its products to Westpac customers. But the factor that has probably set BT apart from the rest has been its strategy to diversify into international markets via the acquisition of J O Hambro Capital Management.
The appetite for equities from international investors is greater than it is in Australia. For whatever reason offshore punters seem to be less risk averse and this works for BT, which now invests 33 per cent of funds offshore compared with 6 per cent in 2010.
ANZ also experienced increased growth in funds under management and increased overall profit from this division by 15 per cent. It got a kicker from better cost controls rather than gains in private wealth operating income, which was flat.
ANZ has not been the poster bank for a successful wealth management strategy and it is rarely the headline grabber in the bank's results.
Nor is wealth management something NAB tends to crow about. The Commonwealth Bank has had better success through Colonial but Westpac's BT probably remains ahead of the pack.
This is no accident. While the average equity market returns contributed 10 per cent over the six-month period to BT it has not been sitting around waiting for equity markets to move in the right direction. Rather it has been positioning itself to get the right mix of investments, part of which is to capitalise on the increased risk appetite from investors in offshore markets.
Australian investors are also less risk averse than they were six or 12 months ago but the margins on wealth management products are higher offshore than in Australia.
The emergence of the white-label superannuation default funds in Australia over the past year have eroded margins and focused retail investors on fees rather than returns.
Investors are understandably weary of high fees when returns tend to stay around the pack. They will pay bigger fees when returns prove to be significantly superior, but they want value for money.
In a general sense investors in superannuation products will no longer pay for active funds managers to produce performance only marginally ahead of the index.
The challenge for BT and its competitors is how to tap into the self-managed super market.