The new mFunds settlement service launched last week by the Australian Securities Exchange (ASX) is yet another development that fits perfectly into the theme of the growing self-reliance of self-managed super funds (SMSFs).
mFunds streamlines access to unlisted managed funds through an ASX platform. The funds can be bought and sold in the same way as shares, using ASX’s CHESS (Clearing House Electronic Sub-register System) settlement system.
The mFunds are not listed: they are not traded between one investor and another with a price set in the market place. The mFunds settlement service follows the same process used by managers to create and redeem units in managed funds as today. The transaction moves from the investor, through an ASX broker, through the exchange to the unit registry of the fund.
The orders are placed as a dollar amount, the manager prices the units and they are delivered to the investor in their Chess HIN (Holder Identification Number) – which is also used to identify the investor’s shares, exchange-traded funds (ETFs), real estate investment trusts (A-REITs) and government bonds. It’s much easier on the memory.
All of the funds offered on mFunds are already open for investment, either through the manager or a platform. Generally, managed funds cost about 2% a year, but the cost differs due to investment fees – which range from 0.5%–1.8% a year, depending on the asset class and the manager, plus an administration fee (usually about 0.7%–1.5% a year, depending on the adviser, size of placement and platform used.)
Going through a platform, there will be a typical wholesale fee of 1%, split between the platform and the fund manager, and a wrap administrative fee, can also be added to the wholesale fee.
Reduced cost
The mFunds will not be cheaper than the same funds available directly from the participating managers, but will be cheaper than going through a retail platform. Through the mFunds service, a fund boutique manager can offer its own funds with its own short-form product disclosure statement (PDS) direct to the retail investor without a platform or wrap fee, reducing the cost compared to a platform.
For SMSFs, buying managed funds has been difficult – SMSFs have needed to have an adviser or to go through a platform. mFunds changes that.
At launch there were 45 funds managers, offering 65 funds, and 12 brokers registered on the mFunds platform. The initial mFunds menu offers funds with exposures to Australian shares, hybrids, global shares, ASX-listed A-REITs, global and Asia-Pacific REITs, Australian and global bonds, global resources stocks, direct and indirect (listed) infrastructure and asset classes Australian investors find difficult to gain access to, but which are popular components of a balanced portfolio in North American markets, for example global credit and syndicated corporate loans.
The mFunds also offer access to funds using particular strategies such as:
- the buy-write strategy (Evans & Partners Australian Buy Write);
- concentrated, high-conviction portfolios, such as SGH 20 and SGH ICE, run by Melbourne manager SG Hiscock & Company. SGH 20 invests in about 20 (15 to 25) companies that are the manager’s best investment ideas, without worrying about index or sector weights; SGH ICE hones in on industrial companies that have built a sustainable competitive advantage through critical intangible assets (such as brands, licenses, patents, logistical capability, or a ‘captive’ client base.)
Diversification
The mFunds will also allow SMSF investors to diversify across types of management: they can establish a portfolio of passive ETFs blended with actively-managed mFunds. Again, they could do this before, within ETFs or by adding LICs to the portfolio, but the new service widens the choice of active managers.
The mFunds service has been touted as a way of weaning the SMSF sector from its love of three main assets classes: Australian shares, cash and direct property, which together account for a massive 75% of all SMSF investments.
In property, too, the mFunds offer very sound diversification opportunities into the Asia-Pacific listed property space – for those SMSFs that want to use it.
But the biggest story of the mFunds introduction is that the unlisted fund managers need the SMSFs more than vice versa. Retail managed funds are looking like yesterday’s product: holdings peaked at $344 billion in September 2007, but are now (March 2014) at $277 billion. This reflects the massive restructure that has been happening in retail wealth management since SMSFs won the future. The unlisted fund managers need the mFunds to deal them in to the SMSF sector, but to SMSFs, they’re just another service provider.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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