As quoted funds and listed investment trusts (LITs) continue to gain ground, more Australian managers are taking their funds to the ASX and CHI-X, writes Mick O’Brien, Managing Director, Equity Trustees.
The explosion of exchange traded products (ETPs) has continued apace in Australia over the past year, with the market cap increasing by 72% to $123 billion according to the ASX 1.
ETPs now far outstrip the mFund, listed investment company (LIC) and listed infrastructure markets, with only the AREIT market claiming a larger market share.
While ETPs were once dominated by passive strategies, in recent years there has been a marked shift in this trend as a range of managers including Magellan, Coolabah Capital and Loftus Peak have launched quoted fund products, also known as active exchange traded funds (ETFs) into the market.
Quoted funds are an effective way for fund managers to tap into the growing demand for listed investments in Australia (we wrote about it here back in October 2020). According to a 2020 ASX investor study 2, 900,000 Australians say they plan to buy listed investments for the first time over the next 12 months, despite an environment of heightened volatility.
A key reason for this popularity is the increase in younger investors who were keen to make the most of savings they accrued during the COVID-19 downturn. Low-cost online brokers, which allow investors to trade quickly at a set price were major drivers of this trend. Many investors are also attracted to the transparency and ease of trading quoted funds.
Quoted funds, LITs or LICs?
The quoted fund market has often been compared to the LIC market, given both offer diversified, professionally managed portfolios across a range of sectors and geographies and both offer low-cost ways to invest in a pool of assets.
However, while the 100-year-old LIC market contains some of Australia’s best quality investment managers, LICs can trade at a premium or a discount to net asset value. In addition, the LIC structure may favour long-term and/or income investing rather than short-term trading.
Quoted funds, on the other hand, generally have an open-ended structure where trading values don’t depart from the NTA and are simple to trade on the ASX or CHI-X.
In recent years we have seen a range of managers bring quoted funds to market. Some are institutional managers seeking to tap into the retail space without the need to market to financial advisers, others are LIC managers and we are also seeing niche players such as private equity managers launching their own offerings.
To further compound this trend, all three major managed investment scheme unit registries in the Australian market can enable a dual registry (listed and unlisted) structure - compared to one a year ago - further opening up the opportunities for managers and choice for investors.
LITs have also gained popularity in recent years because their closed-ended structure enables the manager to invest in assets that require longer investment time horizons, such as property, some types of fixed income and infrastructure, without having to sell assets to meet withdrawal requests.
Another benefit of LITs is that they do not have some of the capital management challenges that LICs can have. As LICs are companies, they pay tax on realised capital gains, which can reduce their NTA, and they smooth investor returns over time by paying dividends from retained earnings. As LITs are trusts, they do not pay tax on income or capital gains and they distribute all net income to investors on a pre-tax basis.
The LIC market has stalled in recent years, with the number of LICs on the market currently sitting at 90, compared to 103 just two years ago 3. Looking forward, we expect to see more investment managers considering quoted funds and LITs when structuring their offerings – and with our experience, we can make it happen for them.
Taking a fund to the listed market
The process of taking a fund to the listed market can be complex and our experience shows that it is important to get the right advice on the right structure – and that experience matters in the implementation.
When launching a quoted fund, for instance, just some of the tasks involved include:
• Revising the fund constitution (if needed)
• Creating a compliance plan to include operating rules and obligations
• Lodging documents with ASIC
• Negotiating service provider agreements with iNAV provider, the market maker and the custodian/ administrator, registry
• Revising PDS documents to enable quoted fund status and dual registry process requirements etc
• Making submissions to the ASX or CHI-X
• Operational readiness
• Updates to websites
• Establishing a reporting cycle.
Engaging a responsible entity that has been through this process multiple times and understands the potential sticking points can not only help to simplify the process but can also save on the time and costs involved.
There is a transformation occurring in the Australian funds management industry which will not only open up new sources of inflows for fund managers but will also expand the range of options available to investors. What will be essential for managers will be engaging the right expertise when tapping into this burgeoning trend.