Getting into the Australian funds market is no easy matter for foreign firms, given the local infrastructure and dominance of domestic banks and other businesses, a report said.

Australia’s fund management industry is tough for foreign managers to penetrate and having the right products is key to breaking through, Cerulli Associates said in a report on the country.

The right product may contain the following characteristics: best in class or otherwise differentiated from other offerings; strongly supported by clients in other parts of the world and/or highly rated by consultants; relevant to an asset class to which Australian superannuation (super) funds actually allocate money; and attractive to gatekeepers at the organisations to which 70 per cent to 80 per cent of financial advisors are in some way linked.

Four of Australia’s largest banks - Commonwealth Bank, National Australia Bank, Westpac and ANZ Banking Group – are “gatekeepers” to much of this market.

Cerulli said managers looking to deal with the largest not-for-profit industry and corporate super funds, or with the for-profit retail funds, face other challenges, such as a tendency towards in-sourcing of investment management by these super funds, which have the scale to run their own portfolios efficiently. Another challenge is increasing use of low-fee exchange traded funds, the report said.

"Australia is a high-cost country in which to do business. Costs come from salaries that are high relative to those that are paid in other countries in the Asian region, high personal and corporate taxes, and an industrial relations regime that makes it difficult to adjust staffing in response to changing commercial conditions," said Thusitha de Silva, director at Cerulli.

The report went on to say that it is uncertain if the mooted Asia Region Funds Passport (ARFP), which could be an entry strategy vehicle for foreign asset managers, will ever take off in the country.

Obstacles to such a passport include differences in tax law in Australia and tax law elsewhere in the Asian region; differences between Australia-domiciled mutual funds, and UCITS and other funds that are widely distributed elsewhere in the region; and the short-term and aggressive approach to investment of Asian retail investors, who are not looking for the same things that Australian investors are seeking.