After a number of years of development, and a few name changes along the way, the Australian Securities Exchange (ASX) mFund Settlement Service was launched in May this year to much fanfare. It was a long awaited development by many in the financial services industry.
With the ASX undertaking an advertising campaign, and a national adviser and investor seminar series in conjunction with its foundation partners last month, it is likely that your clients will increasingly become aware of mFunds, and will soon be asking about how the mFund Settlement Service works and whether it is right for them.
The mFund Settlement Service is an ASX initiative that allows investors to buy and sell units in selected unlisted managed funds (mFunds), through a process similar to investing in shares. It was launched with the promise from 70 foundation members (who together make up one third of retail funds management) that it would make processes more efficient for transacting in managed funds.
mFunds can be bought and sold through an ASX stockbroker online, in person or through a financial adviser who uses a stockbroking service on their behalf. mFund products are unlisted and not traded between investors on the market, but are settled directly with fund managers via the Clearing House Electronic Sub-register System (CHESS). Unit prices are set by the fund manager, usually at the end of the day. In total, there are already about 50 mFunds available on the ASX.
The mFund Settlement Service offers a number of advantages over the traditional way that investors use managed funds, and, in the case of self managed superannuation funds (SMSFs) in particular, mFunds can help with improving portfolio diversification. Other advantages include access to a range of assets, streamlined transactions, cost effective processes and full transparency.
For those who already own shares, mFund also provides access to a familiar system as the transactions are done through the ASX CHESS platform.
Compatibility with SMSFs
mFunds are considered to be particularly compatible with SMSFs, with their $500 billion in assets. According to the ASX, Australia's one million SMSF trustees have already overwhelmingly voted to use the ASX as a way to gain their investment exposure. Of the $500 billion in the SMSF pot, $200 billion is already invested through the ASX (Source: ATO SMSF Statistical Report).
By investing only in ASX equities, and usually in a concentrated portfolio, SMSF investors have limited their investment options to a small number of domestic stocks, often banks, telcos and large miners, without the benefit of true portfolio diversification across a range of asset classes and sectors.
With the right financial advice, mFunds will allow investors to diversify quickly and easily, with a system and process with which they are already familiar.
The range of funds available on the mFund Settlement Service runs the gamut from international and emerging markets share funds, to diversified property funds, to local and international fixed interest funds and infrastructure.
Investors can access these investments in a way that looks and feels very similar to how they would transact shares. The holdings are on their existing ASX holder identification number (HIN).
The experience of broker Baillieu Holst bears this out. Director of Institutional Sales, Mr Alex Hay, says as a foundation member of the mFund Settlement Service, the firm has found that clients like the convenience of tracking their managed fund investments using the same systems they use for shares and other securities, and that the service has been well received.
It is not only SMSFs that need portfolio diversification. The 2012 ASX Australian share ownership study shows that 26 per cent of Australians only own shares directly, with no indirect investments through vehicles such as managed funds.
By overlooking managed funds, these investors could be missing out on benefits such as portfolio diversification.
The mFund Settlement Service can provide this diversification quickly and easily as with even one transaction with one mFund investors gain access to a range of underlying investments and asset classes that may have otherwise been out of reach.
Looking to cash
After shares, the next biggest asset class for SMSFs is cash, with the latest Australian Taxation Office (ATO) figures indicating cash holdings are sitting at $150 billion, roughly 30 per cent. The opportunity for advisers is to raise the question with their SMSF clients as to whether one third in cash is too much, and how else it can be allocated.
Increasingly, SMSFs need to look at their asset allocation. Via mFund, investors have access to fixed interest, international equities, Australian equities including large cap, small companies, dividend income and concentrated as well as global and Australian listed property securities.
With the right advice, your clients will be able to make an informed and calculated decision on the best way to structure their investment portfolio to ensure cost effective diversification.
Rowena Cole is General Manager, Strategy & Operations – Corporate Trustee Services, with Equity Trustees.
