Armed with a preliminary discussion paper from the Australian Stock Exchange (ASX) and some overseas research, it is timely to consider the implications of the ASX’s tentative plans to create a listed managed fund market in Australia.
Before proceeding it is important to stress that the ASX has only couched its proposal in tentative terms, seeking industry input as a first step in deciding whether to pursue the opportunity.
The concept involves parcelling up a selection of participating manager’s existing unit trusts as a listed security that can be traded on the ASX. The ASX proposal is certainly not something that will happen overnight as there are some key regulatory and operational hurdles to be overcome.
Some of these include whether a prospectus would be required at the point of purchase and how to create a workable secondary market given the gap between a real time pricing requirement for listed securities versus the end of day unit price that fund managers usually provide. Just what price would the listed vehicle trade at relative to the unit price that non-listed investors receive?
For now, let’s assume the issues can be worked through, look at the overseas experience and crystal ball some of the implications for advisers, fund managers and investors.
US experience points to a well established market in listed index funds known as exchange traded funds (ETF). The first ETF was launched in the US in 1993, but unlike the ASX proposal which proposes to list actively managed funds, the entire US experience to date has been on ETFs that track a recognised market index. Asset growth has been strong, doubling each year for the past six years, now reaching US$70 billion, but this is only one per cent of the US mutual fund industry.
US pundits see an actively managed ETF as the holy grail of the industry, opening the door to 80 per cent of the mutual fund industry which is actively managed. To date the hurdles have been too high, and such innovation has only been achieved outside the US.
In an industry first Deutsche Bank caused waves by launching 11 actively managed ETF-style instruments in Germany last November. New York’s Global Finance magazine quotes, “It’s growing like wildfire and now everybody wants in. Most US fund developers expect the first actively traded ETF to hit the US market by the end of this year or in early 2002, after regulatory issues have been resolved.”
In the context of these global developments it seems the future could hold actively managed ETFs for us to contend with as an industry. The ASX’s proactive stance in canvassing industry opinion is a commendable initiative to help Australia keep pace with the global environment in which we operate.world we live in.
If actively managed ETFs eventuate in Australia, then what does this really mean to us? Change always leads to opportunities. In my opinion ETFs have potential to provide an excellent growth opportunity to both the financial planning and managed investment industries.
Some Australian share ownership statistics point to the opportunity. Around 54 per cent of adult Australians own shares and 13 per cent of these in turn hold them indirectly through managed investments. Around one third of direct shareowners have one stock in their portfolio and a further one third hold two or three stocks.
As industry professionals we know that with such inadequate diversification, not to mention lack of stock research, these investors have probably had their first “surprise” (i.e.T2 investors) and if not, then it is likely to be around the corner.
Clearly an actively managed unit trust provides a superior risk/return option than a three stock portfolio, but now becomes available in a much more user friendly environment for the direct share investor. A number of key implications would arise including the ability to make “like for like” comparisons.
Listing would allow actively managed funds to be more readily compared on a “like for like” basis with the direct share portfolios currently held by investors. Easily accessed online stock and portfolio tracking tools would for the first time highlight to self taught direct investors the benefits of diversification and superior stock selection simply and graphically. In contrast investors currently have a lot of trouble interpreting the various performance league tables for managed funds and can rarely match their investment dates to the performance tables to make valid comparisons.
Listing would also removes the perceived barrier to investing in managed funds. It is easy to transact on the stock exchange. Most investors are familiar with this, expect to pay brokerage and know the settlement process. This contrasts with managed funds where some perception still remains of expensive up front costs and a lot of paperwork to add to the pain.
At the same time listing managed funds would tap a new market for advisers . Listing actively managed funds will put unit trusts on the radar screens of direct investors for assessment in a familiar environment. Once accepted by an investor, in this environment the complexity of choosing which listed managed fund is not removed. Just as a direct share investor will often refer to a broker I believe these investors will refer to financial planners.
The fact that 90 per cent of managed investments are currently recommended by advisers proves the point that managed investments are seen as the domain of a financial planner. This creates the opportunity for financial planners to provide full service advice to a previously untapped market representing up to 40 per cent of the adult population.
Adviser remuneration has been considered carefully within the ASX discussion paper. In addition to up front brokerage charged to clients, the CHESS system is capable of paying trail commissions and/or ongoing advice fees. This allows ready implementation of an asset management pricing basis for advisers that captures both direct shares and listed managed funds.
I doubt that Australia will let the world go by when it comes to listing actively managed funds. Globally, the direction appears to be clear. Listing managed funds would provide investors with greater transparency and ready access to the managed funds industry, growing the advice and funds management marketplaces and leveraging the skills of financial planners.
By Bruce Murphy, head of retail, Deutsche Asset Management
