This article appeared in the March 2015 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
By Ian Irvine, ASX
Retail investors and trustees of SMSFs have typically preferred investing in Australian equities when trading via ASX.
This is not an unusual outcome as investors around the world tend to have a domestic bias that is, choosing investments they feel comfortable with, in local companies within industries and sectors they know.
This is typified in Australia by choosing to invest in what Australia does well - financial services and mining and resource-related companies. These two sectors combined account for more that 60 per cent of the S&P/ASX 200 index.
One of the key tenents of investing is diversification, across a range of different asset classes. Where there is a preference to use ASX, this may present a challenge for some investors who feel comfortable with their Australian equity portfolios but would like to introduce other asset classes to the equation.
A new service from ASX, called mFund, can help.
A quick look at the SMSF sector's asset exposure reinforces how concentrated holdings are to ASX-available product and cash (at-call and term deposits). See Figure 1 below.
Figure 1: SMSF assets
SMSF Asset $560 Billion June 2014
ATO Statistical report
The mFund Settlement Service
In May 2014 ASX launched the mFund Settlement Service (mFund). It provides investors, SMSF trustees and their advisers with a way to access additional asset classes not readily available by buying a share in a company listed on ASX. But although not listed on ASX these additional assets are bought or sold through ASX in a way that is similar to buying or selling a share.
mFund provides this access to a growing number of unlisted managed funds and can deliver benefits, opportunities and advantages for direct investors.
Managed funds are not a natural choice for direct or SMSF investors, yet they provide access to a broader range of investment options and are managed by a professional fund manager.
Although many investors are comfortable with their own skills and knowledge when it comes to Australian equity investments, in deciding to step away from this comfort zone it may be helpful to have a professional manager working with them.
Another factor that may have inhibited the use of managed funds by direct investors was the paperwork. To buy or sell units in a managed fund required the completion of a lengthy paper-based application and for investors to be identified - more paperwork and certification.
Add to this the delay between mailing the paperwork and sending payment with the application or by BPAY, and no matter how appropriate it may have been to invest in the fund, it may have just been all too difficult. mFund makes this a thing of the past.
With many key economic drivers tending to go against trends that favour domestic investments such as the resources sector, mFund can provide access to investments such as global equities or global fixed income, as well as asset classes such as infrastructure or property securities, which tend to have stable income streams.
How it works
mFunds are accessed via an ASX broker participating in the mFund service. This is the first step in removing the too-hard factor, because the broker transfers information electronically and the investor, having been identified at the time of setting up the broking account, does not need to confirm these details at each mFund transaction. It is done once up front.
The holder identification number (HIN) allows the investor to hold all investments accessed through ASX with that broker on that HIN - mFunds alongside shares, for example.
The mFund service follows the same process as for traditional unlisted managed funds today. That is, an investor applies for a dollar amount to be invested in an mFund; the manager receives the investor's funds and prices the units before calculating how many the funds will buy. The units are delivered to the HIN and can include fractional holdings. For example, 5,000.12345 units alongside 5,000 shares in company ABC.
How to choose an mFund
If investors and SMSF trustees are looking to diversify investments beyond large-cap Australian equities using an mFund, it may be helpful to seek advice from an adviser. Alternatively, an investor can view a list of fund managers and funds available in the service as well as brokers connected to mFund.
By selecting the Find a Fund button at the website, the full list of mFunds is displayed along with pertinent information about them. This includes prices, performance and fees. Importantly, a copy of each fund's product disclosure statement (PDS) is available. An investor must acknowledge receipt of the PDS before entering an mFund transaction.
This function is especially helpful if an investor decides to invest in a particular asset class, say fixed income, and then by using Find a Fund and the search function to sort only those mFunds providing fixed-income exposure. Investors can make comparisons between those funds. The short video link below demonstrates how this function works.
When choosing any investment it is important to undertake research, and when considering investing in a different asset class, education or advice to assist in forming a view on its suitability becomes more important. The links below to the mFund website provide access to:
- Upcoming webinar: Join Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital as he discusses recent falls in commodity prices, interest rates and the Australian dollar and what this means for investors.
- mFund managers in, or preparing to join the service
- mFund brokers
- mFund news and articles of interest
About the author
Ian Irvine is Head of Customer and Business Development at ASX.
ASX holds face-to-face seminars and courses around Australia covering the mFund Settlement Service and a range of other products and investment themes. If you would like us to keep you posted about upcoming events, register to be included on future communications.
© Copyright 2017 ASX Limited ABN 98 008 624 691. All rights reserved 2017.