Managed Funds on the ASX

This month’s Wealth Pipeline discusses the soon to be released ASX managed funds service known as mFund Settlement Service. 

Managed Funds on the ASX

A managed fund is a professionally managed investment portfolio that investors buy into, purchasing 'units' rather than the underlying assets of the fund.  An investment manager then invests the pooled funds to purchase shares or other assets on the investors’ (or unit holders’) behalf.  The value of a unit in a managed fund will rise or fall with the value of the underlying assets. 

Investing in managed funds today

There are currently two ways of investing in managed funds.  The first way is directly through a fund manager, this generally entails filling out a paper application form and posting it to a fund manager as they require an original signature.  The fund manager processes the application then contacts the investor for payment.  This process is cumbersome and can be quite time consuming especially if several managed fund investments are made at the same time.

The alternative method is to invest through an investment platform such as a wrap account or master trust.  Investment platforms are usually only accessible via a financial adviser.  A platform is effectively like an online share trading account that permits investors access to managed funds as well as listed securities.  Investments platform allows individual investors to harness the power of group buying to circumvent investment minimums and provides them access to a wide range of funds.

Investing in managed funds (regardless of whether purchased directly or through a platform) have certain disclosure requirements.  Specifically, a fund manager is unable to issue investment units unless it has received an application that was included in or accompanied by a product disclosure statement (PDS).

Investing in Managed Funds using the mFund Settlement Service

Investing in a managed fund on the ASX platform will be similar to buying a share, however units will not be traded between a buyer and seller with a price set by the market.  The mFund Settlement Service follows the same process used by managers to create and redeem units, however the process will be digitally simplified.  The transaction will be from the investor via an ASX broker.  Orders would be placed as dollar amounts and the manager would then price the units before they are delivered to the investor in their Broker Chess HIN (Holder Identification Number) account.   

mFund Settlement Service Specifics

At present there are 45 fund managers who have signed on to use the mFund Settlement Service, far less than the number of fund managers available to platform users.  The service is expected to be rolled out during the first half of 2014.  In order to satisfy the disclosure requirement discussed above, investors who use the mFund Settlement Service need to acknowledge receipt of a fact sheet and a PDS, with a ‘tick the box’ to confirm.  As the purchase and sale of units in managed funds will be via a broker, the broker is required to carry out an identity check on the investor rather than the fund manager.

Our Comments

The mFund Settlement Service is a potential game changer for the funds management industry, financial advisers and investors.  Investors will now be able to invest in managed funds with greater ease than paper based applications and potentially cheaper administration costs than an investment platform.  The service will open up the investment universe to investors many of whom are underweight international shares and those that want to avoid financial advisers. 

The likely consequence of mFund on stockbrokers is far more subtle.  Stockbroking firms generate the vast majority of their revenue from investors buying and selling securities, however shares are traded far more frequently than units in managed funds.  Therefore, if the mFund settlement service results in investors apportioning a greater percentage of their capital to securities which are held for longer periods (managed funds instead of shares) this will lead to a reduction in overall security trades thus impacting on stockbrokers’ turnover.

Interestingly none of the big four banks have signed up to be founding members of the mFund Settlement Service.  Call us cynical but we believe the reason for this is that the banks own investment platforms and the view mFund to be a threat.  As there are only 45 fund managers who have signed on to mFund, the ASX service will not immediately be an alternative to platforms. 

We are eager to see where the mFund Settlement Service is in 3 years’ time and whether the big banks have signed on and how the investment universe will compare to that of the platforms.