I recently published a blog about mFunds. While doing some research on the subject, I spoke to a number of financial advisers and brokers.
One comment stuck in my mind: “Magellan killed the mFund.”
It was such a pithy statement, I felt the need to delve more deeply into that throw-away line and examine Magellan’s innovative Exchange Traded Managed Fund (ETMF) and others of that ilk. Not least because, according to research undertaken by Investment Trends/BetaShares, 61 percent of financial advisers are interested in using ETMFs in the future, and those advisers not currently recommending ETFs show a greater propensity to recommend ETMFs.
The research must have been compelling – just last month BetaShares teamed up with AMP Capital to launch two ETMFs.
What is an ETMF?
Firstly, a quick recap of mFunds and ETFs.
An mFund is a managed fund that is listed, but not traded, on the ASX. It cuts down on paperwork and details are recorded in CHESS. Investors still have to wait until the day’s unit price is struck – generally the following business day – to learn the price at which they have bought or sold units in the Fund.
An ETF is a rules-based investment, generally built around an index. It offers absolute transparency – an investor can see the price and composition of the Fund at any point of the day.
An ETMF shares some characteristics with both mFunds and ETFs, but some very important differences, which makes this emerging sector all the more exciting.
An ETMF provides:
- The ability to buy and sell units on the ASX and settle via CHESS – no lengthy application forms
- Live and transparent market pricing rather than having to wait for that day’s unit price to become available
- Access to a fund manager’s investment strategy, research and expertise
- Active management, unlike ETFs that are generally passively managed around an index
- A tight price range around the Fund’s net asset value, unlike a Listed Investment Company (LIC) that can trade at a discount or premium to net asset value, depending on what investors are willing to pay.
Fundamentally, an ETMF is listed security – the broker places an order and executes at known price. All details are recorded in CHESS for simplicity. It takes the mFund the next, and important, step. A genuine listed, actively managed portfolio with access to live market pricing and the ability to buy and sell the Fund’s units in the secondary market as easily as any other ASX-listed security.
Australia leads the way
The greatest difficulty for a fund manager in listing portfolios – whether on a managed account or on the market – is finding the balance between adequate disclosure and protecting their intellectual property. After all, if a portfolio is visible in real time, what’s to stop investors mirroring it and saving the management fee?
The ETF transparency rules, which are consistent world-wide, were the biggest hurdle for Magellan when negotiating with ASIC and the ASX to launch its ETMF, the Magellan Global Equities Fund (MGE).
Like an ETF, MGE has a live market making function; the negotiations resulted in the ASX and regulator agreeing to quarterly disclosure of portfolio details, with a two month lag, thereby balancing investors’ need for transparency with the fund manager’s need to protect its IP.
According to Magellan’s General Manager-Distribution, Frank Casarotti, the viability of the product hinged on this agreement, which has opened the door for other fund managers to launch their own ETMFs. Indeed, managers in other jurisdictions have watched with interest and similar products are now emerging in other markets.
ETMFs are generally comparable to their unlisted counterparts; in the case of Magellan, they have the same investment strategy, investment portfolio and management costs.
The future looks bright
So has Magellan really killed the mFund? Given that the number of mFunds being listed continues to grow, I think not.
However, ponder these statistics from the ASX Monthly Update (note: MGE represents one product, mFunds the entire cohort).
Although not all ETFMs are growing at the same rate, I don’t imagine it will be long before they too are experiencing halcyon days with the same growth trajectory experienced by ETFs over the past ten years. And, I suspect, mFunds will a run a distant third.
Originally published by OpenMarkets