ASX has launched its much-anticipated mFund Settlement Service. Peter Dorrian examines the benefits of the exchange’s latest initiative.
Direct investing has become a phenomenon in Australia. Sparked initially by the attractively priced privatisation of state-owned assets through the late 1980s and 1990s and stoked by a rapidly rising domestic share market leading up to 2007, direct investing grew quickly. Although it has declined somewhat along with overall share ownership in the past few years, at the end of 2012, around six million Australians, representing 34 per cent of the adult population, held direct shares, according to ASX’s 2012 Australian Share Ownership Study. By contrast, only 2.1 million investors used managed funds.
The rise of online trading and the evolving needs of investors – evidenced by the burgeoning self-managed superannuation fund (SMSF) sector – have underpinned the popularity of direct investing. And the 2008 global financial crisis only fuelled investor demand for greater control, transparency and flexibility.
As a consequence, Australian investors, particularly SMSFs, have a very high exposure to domestic equities. According to the Australian Taxation Office, there are more than 516,000 SMSFs with an average balance approaching $1 million. The bulk of that money is invested directly in Australian shares, cash and property.
The new mFund Settlement Service could soon change that by offering investors access to unlisted managed funds that invest in a variety of asset classes and investment strategies. Automating and tracking transactions using the ASX settlement system CHESS, the new service aims to make investing in managed funds as affordable and seamless as buying shares through a broker.
The platform was developed with the $520 billion SMSF market in mind, and has already processed its first transaction.
The chance to diversify
The barbell approach to investing, where portfolios hold only the safest asset – cash – and relatively volatile assets like equities and property, rarely delivers optimal returns, and the high exposure to only two or three asset classes makes it higher risk. Yet, this approach is quite common in Australian portfolios.
ASX believes mFund will empower investors to build more diversified portfolios. Investors will have access to alternative investments including global and emerging market equities, diversified fixed income and micro caps, among others. By diversifying and reducing their exposure to one or two asset classes, investors can lower the overall level of risk in their portfolios.
The other key benefit of mFund is that retail investors will have access to previously inaccessible institutional and wholesale fund managers.
Support for mFund
ASX has secured the support of fund managers that control over a third of Australia’s retail funds under management. There are approximately 65 foundation members, including 44 funds managers and responsible entities (PIMCO among them), 10 external unit registries and 12 ASX brokers.
While the mFund concept may appear to threaten the large institutions that manage the dominant master trusts and wrap accounts, ASX maintains that the service will provide all parties, including brokers, banks, industry funds, accountants and advisers, with the opportunity to reach another retail distribution channel.
Financial planners, who act as trusted advisers to their clients, should have nothing to fear from the introduction of mFund. The advice profession is a service industry, not a transaction-based industry, and there will always be a need for quality financial advice tailored to meet clients’ individual requirements and objectives.
The mFund service is another option available to investors, advisers and brokers, and could make the need for expensive paper-based application and redemption of managed funds a thing of the past.
