The ASX is in the process of building a new access channel for managed funds. Karin Derkley examines the anticipated difference the Aqua II model will make for SMSF investors.
The Australian Securities Exchange (ASX) is hoping its new managed funds service (MFS), Aqua II, will attract SMSF investors who up to now have been reluctant to invest in the area. The service, which has yet to receive regulatory approval but is expected to be up and running by mid-year, will provide a quoting service to enable automated transactions of managed funds using its Clearing House Electronic Subregister System (CHESS).
The service will allow investors to use the ASX to access a greater array of investment classes, such as micro-cap managed funds and international funds, as well as access to a professional manager at a competitive rate, ASX head of customer and business development Ian Irvine says.
“It’s going to be a much easier, more straightforward way of transacting managed funds for everyone via the central settlement of CHESS,” Irvine says.
“It will bring a lot of the efficiencies associated with equities to managed funds as well.”
Entry and exit prices for a managed fund will be quoted on the ASX, under an extension of its Aqua Quotation Rules. Investors will apply for, redeem and settle their fund holdings using ASX’s CHESS system, which is used to settle transactions of ASX-listed securities. Prices are set by managers on a regular basis (usually daily) and the investor applies for a dollar amount without knowing the price they will receive – in the same way as traditionally applying for managed funds. Buying managed fund units via the service will involve paying a broking fee, plus the fund managers’ management expense ratios (MER) on individual funds.
Apart from the efficiency and potentially lower costs of transacting managed funds via the service, the ASX is hoping that providing it via the CHESS platform will overcome the traditional reluctance of SMSF investors to invest in managed funds.
“We know that SMSF investors like the exchange. If we can give them access to other investment assets via the same platform, it may encourage them to diversify,” Irvine says.
Investors will also get easier and more timely access to reporting rather than just at the end of the financial year, he adds.
To SMSF advisers the service seems promising. Crystal Wealth Partners executive director Tim Wedd can see the value of being able to buy and sell managed funds on the same platform as equities, “as long as they are offering good front-end solutions and deliver a competitive price”.
At present, managed funds are the “clunkiest” of assets to administer, Wedd says. His high net worth SMSF clients invest in selective managed funds only, such as wholesale international fixed income or specific opportunity funds.
Crystal Wealth offers a discretionary managed accounts service and also uses Multiport’s administration service, but Wedd says there is still far too much paperwork involved in investing in managed funds.
“To the extent that we use managed funds, the forms are all different across the different funds,” he says.
He says he understands why investors have been driven to platforms hoping it will reduce the paperwork, “but our clients are not interested in platforms”.
Eureka Financial Group specialist SMSF adviser Andrew Jones also says there is definitely room for another distribution channel for managed funds. His SMSF clients use managed funds to invest in areas that are not practical to invest in directly or via an exchange-traded fund (ETF) – “for ethical tilts, global infrastructure, managed futures or fixed interest where you don’t always want to be indexed in particular cycles”, Jones says.
Many of his SMSF investors don’t want to use platforms, he says.
“We’ve been asking managed fund houses for years to list their flagship funds and this could be a good way for them to do that,” he says.
Multiport technical services director Phil La Greca sees the biggest benefit in bringing down transaction times. “If you are wanting to change funds, then the transaction time might be quicker than regular traditional redemption times. The thing is you could place both a sell and buy order in the one day. That would have to be a huge advantage,” La Greca says.
However, he suspects the service will be more appealing as a way to invest in popular specialist funds rather than regular Australian equity funds.
“Given the average SMSF investor already has the top 10 stocks, why would they go and buy another generic Aussie equity find that invests in the top 10? But they might be interested in buying a small-cap or value fund or some other thematic fund,” he says.
Wedd agrees: “If it was just Aussie equity funds it would not be likely to appeal – our clients are looking for more interesting investment prospects.”
Irvine says the service was a response to demand by fund managers as much as a desire to cater to investors who prefer to transact via the exchange.
“Product managers were bringing us products that didn’t fit into our regular listing rules. And we figured that if we could provide a settlement service for shares, listed investment companies and ETFs, why not managed funds as well?” he says.
The service will be particularly useful for boutique managers who have found it expensive and time-consuming to list or distribute via a platform, he says. Around 60 foundation members have been signed up to the service – a combination of big household names, and other smaller boutique managers, he says. Members will pay just $5000 to quote a fund on the CHESS system, plus an ongoing charge of 15 basis points for amounts of money held in CHESS. The service should reduce administration costs for managed funds, Irvine says, which will hopefully in time reduce costs passed on to investors.
Equity Trustees is a founding member of Aqua II and head of corporate fiduciary and financial services Harvey Kalman says it is a great opportunity to give self-directed and SMSF investors access to his organisation’s suite of boutique funds.
“This market of mum and dad and SMSF investors is very fractured, and many of them don’t use platforms. But most of them do buy and sell through the ASX. So this is giving them the chance to buy managed funds the same way they have been used to buying shares,” Kalman says.
BNY Mellon Asset Management managing director Bruce Murphy sees a huge advantage in being able to bring the United States-based fund manager’s suite of products to Australian investors.
“If we offered these kinds of products via an offshore retail fund, the administrative costs would make the cost to the investors so high it would wipe out any alpha. Via a platform it could be even more expensive. This is bringing down the cost considerably. We see the service as a great innovation – it’s providing to the Australian investor something they haven’t had access to before,” Murphy explains.
Vanguard Investments Australia head of market strategies and communications Robin Bowerman says the fund manager is watching the developments with interest.
“It’s always good to see this kind of development, and we can see the great attraction this would have for SMSF investors,” Bowerman says.
Vanguard, which already issues ETFs over several of its flagship managed funds, is adopting a wait-and-see approach to the new service. “Given we already have two distribution channels, it will depend on the kind of demand we see out there from investors and advisers over the next couple of years,” Bowerman says.
Irvine says the service will prove particularly appealing to SMSF investors who tend to do their own research on actual investments. ASX will provide them with education and access to information relating to the funds participating in the service via the ASX website and in face-to-face sessions.
“These people generally want to do their own research, form their own view and then talk to their adviser who provides the strategies and structural advice.”
Without adviser involvement, however, Jones doubts many SMSF investors will find their way to managed funds via the service.
“Most SMSF trustees are interested only in equities, term deposits and property. We are the ones who encourage them towards managed funds in the interest of diversifying,” he explains.
Indeed, one of the biggest hurdles for the new service may indeed be the lack of interest by SMSF investors in managed funds. La Greca says that currently just 16 per cent of SMSF assets held by Multiport’s administration service are in managed funds, down from 20 per cent 12 months ago.
Furthermore, Investment Trends surveys have shown the percentage of SMSFs invested in managed funds declined from 11 per cent in 2007 to 9 per cent in 2010, and has since dropped further with just 6 per cent of SMSFs investing in managed funds in 2012.
“Fund managers are facing significant headwinds from SMSFs. The SMSF investors are very price sensitive, and with market returns remaining flat or negligible, SMSF investors have stopped seeing value,” Investment Trends senior analyst Recep
One positive glimmer for the ASX’s MFS, however, is while SMSF investors aren’t big fans of managed funds, they are clearly interested in diversifying beyond a strict portfolio of equities. ETFs, which provide access to an index via the CHESS platform, have been growing steadily in popularity among SMSF investors in recent years. In 2010, 23,000 SMSFs held ETFs, growing to 30,000 in 2011, and again to 33,000 in 2012 – a 30 per cent increase in two years.
Peker says SMSF investors like ETFs for their diversification, low cost and liquidity – characteristics that could also be conferred onto managed funds offered by the MSF.
And the ASX is certainly banking on
this fact. “We are trying to make a product that SMSF investors are currently not using look more like products they use more of,” Irvine says.
However, while managed funds bought and sold on Aqua II are likely to be lower cost than investing via a retail fund or platform, Peker says that may not be enough to change the appeal of managed funds in themselves. MERs charged on the actual underlying managed funds are still a barrier, and there are questions over their ability to add value in the current market.
“SMSF investors are very price sensitive, and managed funds have added so little value in recent years. Overall managed funds are in a tough spot,” Peker says.
Those advising SMSF investors say one of the biggest benefits of the new service may be to give the existing platform industry a much-needed shake-up.
Jones is hoping the competition prompted by the service will bring in a more cost-efficient distribution system.
“This is going to force platforms to think about what their value-add will be. There’s been a ring fence for long enough around managed funds. There is definitely room for another distribution channel – there are lots of SMSF investors who don’t want to use platforms,” he says.
He is hoping the service may bring down MERs and buy/sell spreads. “If the service brings in competition that brings in a more efficient distribution delivery, that has to be good for the investor.”
A more cost-effective service would
also help keep costs down in a more competitive financial services environment, according to Wedd.
“Before the FOFA (Future of Financial Advice) changes, platforms were closely aligned with distribution. But now it’s moved to being about advisers being able to add value in a more transparent environment – in which case the lower the cost of the background stuff the better.”
Although on the face of it the service looks to be competing head on with existing platforms, Irvine says this is not the intention, and that the service could in fact also be used by platforms themselves to streamline transactions.
“Everyone for us is a potential customer all around the central settlement of CHESS and it can also be used by platforms who can use the service to leverage their efficiencies,” he says.
How it works
- Entry and exit prices of managed funds are quoted on the ASX price display board as last set by the manager (not intraday prices as with shares).
- Settlement is through CHESS reconciliation.
- Management of client records is centralised through ASX brokers.
- Investors get a holistic view of investments under their holder identification number.
- Benefits include ease of transition between funds, reduced paperwork, enhanced processing and timely reporting.