How mFund is helping investors put money to work
Easy-to-use service provides more choices to diversify away from a concentrated exposure to Australian shares – or cash.
For investors unintentionally building up their cash holdings because they do not know where else to invest or do not want to put more into the same type of investments, considering a managed fund may provide a way to better deploy low-return cash.
Let’s consider why choosing a managed fund may help resolve challenges for investors seeking diversification and how the ASX mFund service can help.
For those only focused on ASX-listed companies, the availability of suitable investments across sufficient investment classes where investors are comfortable to “go it alone”, may be running out.
Using superannuation as a measure, it is apparent that the more than $2 trillion in super cannot all be invested in the available $1.7 trillion value of companies listed on ASX.
Further, of the approximately $600 billion held in Self-Managed Superannuation Funds (SMSF), around $230 billion is in ASX-listed companies (source: ATO statistical report, September 2016) and accounts for approximately 13 per cent of the value of equities on the exchange. Thus, many SMSFs are “long” on large-cap Australian equities.
In recognition of the need to provide a greater array of investment opportunities across a broader range of asset classes accessed via the exchange, ASX has encouraged and facilitated fund managers using different product structures to come to the market. These include exchange-traded products (ETPs) – notably ETFs, for example, which sit comfortably alongside other structures such as A-REITs and LICs, which are well known to many investors.
More recently, managed funds have become available on ASX following the introduction of the mFund settlement service, which enables investors to buy and sell managed funds using an ASX broker with similar convenience and ease in much the same way as they transacted shares, and with the added benefit of holding these investments in CHESS, alongside existing investments in shares, LICs, ETFs, etc.
The mFund settlement service can provide a way to diversify away from a concentrated exposure to Australian equities, and gain exposure to global markets or asset classes, such as fixed income, that are not easily attainable by investing in a company listed on ASX. Diversification is one way to manage risk and is often referred to as “the only free lunch in investing”.
However, managed funds have not typically been easily available to investors wishing to hold the investments in their name or that of their SMSF. Many have been put off by the challenge of completing paper applications, providing certified copies of documents and sending these to fund managers. Managed funds acquired in this way have not been held alongside other investments.
The mFund settlement service has streamlined the process for investors to apply for units in managed funds. Investors can now focus on the investment decisions relating to which asset class or classes they should consider; how much should they invest; and which funds they should use.
How it works
The mFund service began in earnest in October 2014. The objective is to provide investors with alternative investment choices to help them diversify, utilising the knowledge and expertise of a professional manager who actively manages the fund and makes the investment decisions for them.
In this way, investors can easily gain access to other asset classes beyond large-cap Australian shares, such as global equities, infrastructure and fixed income. mFund is intended to provide compatible alternatives, which sit comfortably in portfolios alongside existing investments such as shares, LICs and ETFs.
The chart below highlights how mFund has helped investors. It shows the percentage exposure to a range of asset classes held by investors through mFund, by month over the year to December 2016.
Interestingly, the largest category is fixed interest (Australian dollar in yellow and global in dark blue), accounting for 35 per cent of mFund assets at the end of December 2016. This is an asset class not well known to Australian investors.
Also of interest is the change in Australian equity exposure, which has grown from 15 per cent a year ago, to a little over 30 per cent. Given that one of the benefits of mFund would be to help investors diversify an Australian equity portfolio, this may seem surprising.
But in the context of the funds that are chosen, such as small and mid-cap stocks or funds that are outcome based (e.g. yield driven), it makes sense because investors are now able to access these sectors using a professional manager. Again, these are areas where Australian investors welcome the assistance of a professional manager in an unfamiliar sector.
Chart 1: Growth in asset classes within mFund
Because the mFund service uses an ASX broker, it is accessed in a way similar to how investors and SMSF trustees make investments in other ASX products – via an online, full-service broker or through a financial planner using an ASX broker to access the exchange.
Gone is the need to complete lengthy paper applications and provide certified copies of documents such as SMSF trust deeds for each investment – in or out of a fund.
Typically, these details are provided to the broker once, at the establishment of the broking account, and the broker holds these details and provides the information electronically for each application for new units, or when an investor requests a redemption. An investor’s Holder Identification Number (HIN) becomes their unique identifier in CHESS.
The pricing of an mFund is different to that of a share. When deciding to invest in an mFund an investor is making a medium to long-term investment decision, say three to five years. There is no on-market trading between investors, which will influence supply and demand as applications and redemptions are between an investor and fund manager, who meet investor demand as outlined in their product disclosure statements (PDS).
mFund prices are set, as for managed funds generally, by the manager, based on the value of a unit in the fund. Generally, managers set these prices daily, however investors will receive the relevant price after their investment funds are received by the manager.
This is a major benefit of the mFund service, as like the investor details, investment funds and distributions are sent electronically via CHESS – no cheques in the mail.
A further difference between shares and mFunds is that units in the mFund investments are held in fractional holdings, in some cases up to six decimal places. However, like shares and other ASX investments, mFunds appear on that unique CHESS HIN, allowing investors and SMSF trustees to have investments in the one place – on ASX.
What is available
At the end of December 2016, mFund had:
- 56 investment managers, with
- 170 funds and
- $250 million in funds invested via the mFund settlement service.
The chart below (at left), shows the split by asset class in percentage terms. The chart on the right shows the growth in the number of funds (blue background) and fund investment value (the line) to the end of December 2016.
About the author
Ian Irvine is Head of Customer and Business Development, ASX.
Ian Irvine is Head of Customer and Business Development, ASX.