When I started asking financial advisers and brokers if they used mFunds, the most common response was “what’s an mFund?” While that is clearly the first reason mFunds aren’t getting the traction some would have expected (or hoped for!), I’ll go back to basics first.
Launched in May 2015, mFunds are listed versions of managed funds. But when I say listed…well, not listed in the same way that shares, ETFs or LICs are listed. There is no trading on the exchange, and investors still have to wait for a Fund’s unit price to be struck (generally the following business day) before learning the price at which they have bought or sold their investment.
"mFund is effectively an administration service"
mFund is effectively an administration service. It allows investors (advisers, brokers) to use the CHESS system to settle managed fund transactions. The ASX likes it because it makes the CHESS HIN a more powerful tool; mFunds can be shown on the HIN and thereby makes CHESS more of a virtual platform.
On the upside (for advisers and investors), it makes for more seamless administration (limiting all that paperwork) and places the burden of AML and client identification procedures on to the broker.
Are mFunds being embraced by the industry? I’d suggest not…at least, not yet.
The average number of mFunds transactions per month is 331
At 30 April 2016:
- 161 mFunds have been registered – less than 10% of the managed funds universe
- 48 fund managers involved
- Average number of transactions per month – 331
- Average monthly value of transactions – $8.70 million.
- Total mFunds under management $127.33 million; when you consider that at 31 December 2015, the managed funds industry had $2,649.2b funds under management, it’s a drop in the ocean.
Definitely not setting the world on fire…and here’s why:
1. The financial advisers
Interestingly 60% of mFunds inflows has come from financial advisers. According to the ASX, they anticipated a 60/40 split between advisers and brokers, they just didn’t expect it to be weighted toward financial advisers. As the statistics show, that’s 60% of a relatively small volume of funds flow.
It’s not surprising that some financial advisers have embraced mFunds – after all, they are used to including managed funds as part of an investment strategy and mFunds are another iteration of a managed fund.
"Advisers don’t understand how mFunds can fit their practice."
On the other hand, most that I spoke to don’t use mFunds because they have pre-existing approved product lists, administration platforms, model portfolios and business models that don’t (yet) include mFunds.
One adviser I spoke to had just returned from a three day dealer group conference; and not a vertically aligned institution that has its own platforms to protect. She commented that on one slide, in one presentation over three days, mFunds got a mention. She couldn’t remember why.
Therein lies a major issue for the ASX and mFunds. Advisers don’t know about them, dealer groups haven’t embraced them – and possibly have yet to see how they fit their business model.
2. The brokers
I can draw on personal experience to share a fact known by many in the industry – brokers who provide advice to clients generally eschew managed funds. Technology, ETFs, a hugely expanded array of LICs – each of these has made it easier for brokers to access asset classes – such as global equities or fixed income – that once upon a time only managed funds could provide exposure to.
The execution-only (non-advisory) broker however, like OpenMarkets, is impartial to what investors and financial advisers trade, so long as they can facilitate the execution, clearing and settlement of the product.
"Many brokers are restricted by back office software providers"
In the case of mFunds, however, many brokers are not able to facilitate its settlement on CHESS due to restrictions from back office software vendors. Since demand is relatively low, many vendors don’t want to bear the costs of implementation.
One broker I quizzed said his clients generally want a truly listed option as an alternative to managed funds, rather than just an ‘easier’ way of settling them (i.e. mFunds). Another suggested that the ‘actively managed’ ETF may have killed mFund.
It seems that an increasing number of investment managers are considering issuing listed managed funds through an ETF structure. These are like ETFs but are actively managed funds. You can buy and sell on market – they are transparent as the NAV is published every 15 seconds. Importantly, they have all the tax benefits of direct securities (rather than inheriting CGT issues in an unlisted managed fund).
Strike two for mFunds.
ASIC regulations have limited mFunds only to those with a short form PDS – i.e. those that are considered simple funds. Think mainstream Aussie or global equities, fixed income, property or infrastructure securities.
The problem with this is that short-form type managed funds tend to look like Australian ETFs. However what SMSFs and other investors are looking for are the more 'exotic' or 'complex' type products, such as global bond and hedge funds. Since these types generally require a long form PDS, they are unavailable via mFund.
"The problem with mFunds is that only those with a short form PDS are available. What SMSFs really want are the 'exotic' types, which tend to be classified as long form and therefore unavailable via mFund."
The ASX is lobbying ASIC to allow these ‘complex’ products, which would open up the range of funds available. Complex products include anything that uses a derivative – such as long/short funds, hedge funds, structured products.
While limitations exist on the types of products that can adopt the mFund structure, it seems less likely that financial advisers, dealer groups and brokers will change their processes and invest in the infrastructure to get behind mFund.
4. The fund managers
So far just 48 managers have signed up to mFund. Is there a compelling reason for their brethren to join them?
"Only 48 managers have signed up to mFund"
Some of the reasons I uncovered for the ‘wait and see’ approach being adopted by a number of managers include:
- Lack of demand from financial advisers and dealer groups
- Additional costs – new issuer and admin costs to the ASX, along with CHESS costs
- Additional admin – another fund, another layer of admin and compliance
- Research costs – while the two major houses don’t charge the full fee to rate the mFund version of an existing fund, there is an additional cost.
This combined with the lacklustre funds flow and the regulatory environment limiting the types of funds that are eligible for mFund status suggests that fund managers won’t be banging down the doors just yet.
5. The investors
According to the OECD, Australian investors have the second highest exposure to equities in the world, and the average Australian super portfolio has a 50% allocation to equities. It’s not surprising that, according to the ASX, 80% of investment into mFunds has been from SMSFs. Most of these investments have been on the recommendation of a financial adviser.
However, to invest in mFunds, one needs to know of their existence and understand how they fit into – and benefit – a diversified portfolio.
It seems to be a less than virtuous circle.
Word is not out. Advisers don’t know about or understand how mFunds can fit their practice. Brokers are disconnected (often literally) and ASIC’s tight control means a limitation on the types of mFund available. This in turn makes it less attractive to fund managers, who generally make demand-directed decisions on participation.
Unless action is taken quickly, mFunds will be overtaken by other ‘fully listed’ investments and may be consigned to the annals of history, to be filed under ‘it seemed a good idea at the time.’
(1) Source: ASX Funds Monthly Update, April 2016
(2) Source: ABS 5655.0 - Managed Funds, Australia, Dec 2015
(3) Source: Pension Markets in Focus, OECD Report, 2015
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