Question 1: Why does STW appear to be out of favour compared to VAS or IOZ as an ETF for the broad ASX indices? Which is the best ETF to get broad share market exposure?
Answer (by Paul Rickard): STW from State Street (the SPDR S&P/ASX 200 Fund) charges more than the others – 0.13% pa. IOZ from iShares only charges 0.09% pa (it also tracks the S&P/ASX 200), while VAS from Vanguard, which tracks the S&P/ASX 300, charges 0.10% pa.
Liquidity is pretty much the same, as is the tracking error. My ranking:
- VAS (because it tracks the 300 shares index rather than the 200 shares index)
- IOZ
- STW
Question 2: I would like your thoughts on the Magellan Global Fund – closed class units in MGF, options on closed class units in MGFO, and open class units in MGOC.
MGF’s share price has been somewhat disappointing. It is now trading at a discount to its NTA (net tangible asset value). Other than the pandemic, what other factors have caused MGF to trade lower? Is MGF essentially like a listed investment company?
Answer (by Paul Rickard): The underlying cause for the discount to NTA of MGF (Magellan Global Fund Closed Class Units), which was 11.5% as of 23 April, is poor investment performance, and the overhang caused by the potential exercise of the options (MGFO) at 92.5% of the NTA.
When close-ended structures such as listed investment companies or a listed trusts such as MGF underperform, it is hard to attract new investors. If you have an overhang of sellers, the price will often slip to a discount.
I wouldn’t give up on Magellan – Hamish Douglass and his team have too impressive a track record. I would continue to back them.
If you hold Magellan Global Fund Open Class Units (MGOC), an obvious trade at some stage will be to sell the open class units (MGOC) on the ASX at a price very close to NTA and buy an equivalent value of closed class units (MGF). Same underlying investments, 10% cheaper! This trade should stop the NTA discount on MGF blowing way out.
Question 3: Could you please recommend an ASX ETF which invests in the Shanghai Composite Index? Do you have a view on investing in China at present for the medium – long term?
Answer (by Paul Rickard): There is no locally listed ETF that invests in companies on the Shanghai Composite index. IZZ from iShares, the iShares China Large Cap ETF, invests in Chinese companies that are listed on the Hong Kong Stock Exchange. This includes companies such as Alibaba and Tencent. Some of the companies (for example, Ping An) are listed both on the Hong Kong SE and the Shanghai Exchange.
In regard to investing in China, it is not top of my list. I worry about the political risk. That said, I do see value in a small exposure to emerging markets given my bearish view on the US dollar – typically, these funds will have around a 25% weighting to China.
Question 4: I’ve been reading IPO prospectuses and am curious about the difference between voluntary and mandatory escrow arrangements, can you please explain the difference.
Answer (by Paul Rickard): With IPOs that have a major shareholder selling down, the ASX will typically require that some of the shareholder’s shares are subject to ‘mandatory escrow’. The shares are not included in the IPO, but rather are effectively “frozen” for the escrow period. This period typically runs out at the end of the prospectus forecast period. So if the prospectus has a financial forecast for the current financial year, the escrow period will expire just after the company announces its financial results for the period.
Mandatory escrow requirement are typically applied by the ASX (as a condition of listing) to companies that are not yet profitable. For example, when Medibank had its IPO, there was no mandatory escrow.
Voluntary escrow is where the shareholders decide to freeze a portion of the shares. They do this because investors are reluctant to invest where there is a total selldown, and also on the advice of the lead managers. For example, in the recent Nuix IPO, Macquarie sold approximately 40% of the shares in the IPO, and put the other 30% into “voluntary escrow”. Later this year (August 2021), these shares will potentially be available for sale.
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