In the third story of a series that commemorates the Australian Securities Exchange’s 150th anniversary in 2021, ASX presents a modern history of listed managed funds. 

 

In 2001, ASX thought its new Exchange Traded Fund (ETF) market would make it easier for overseas fund managers to invest in ASX-listed companies [1].  Few knew at the time that ETFs and other ASX-listed funds would transform asset allocation for Australian retail investors. 

In August that year, State Street Global Advisors launched the market’s first ETFs[2]: the SPDR S&P/ASX 200 Fund (ASX: STW) and SPDR S&P/ASX 50 Fund (ASX: SFY). 

By 2002, ASX had 12 ETFs collectively worth about $500 million.[3] Although ETFs were taking off overseas, Australia’s ETF market was small and mostly used by professional investors.

For some retail investors, buying an ETF for index exposure and portfolio diversification was a less popular approach. Back then, a third of Australian adults who owned shares directly had just one stock in their portfolio. Another third owned only two or three stocks.[4]

Today, the ASX Exchange Traded Products [5](ETPs) market is worth $109 billion.[6] There are 221 ETPs over the main asset classes, across developed and emerging markets.[7]

ETPs are part of one of the great trends in ASX’s modern history: the growth of a large, diverse market of investment products on ASX that includes: 

• ETPs
• Listed Investment Companies (LICs) and Listed Investment Trusts (LITs)
• mFund - a service to buy and sell unlisted actively managed funds
• Australian Real Estate Investment Trusts (A-REITs)
• Infrastructure Funds

To recap, ASX is presenting a series of essays this year on its ‘modern history’. We’ve chosen 1998 as the starting point for this series because that is when ASX became the world’s first exchange to demutualise and list directly on its own exchange.[8]

Previous essays in this series include, “The Changing Face of Australian Share Ownership,” and “Why Australia is One of the World’s Great IPO Markets.”

Few topics in this series are as important as listed funds given their role in helping investors achieve full asset allocation via ASX; construct and maintain diversified portfolios; access local and global opportunities; and reduce fees.

There are now 617 funds on ASX (including those available through mFund) with a collective market capitalisation of $395 billion in May 2021.[9] 

Although growth in ETPs has attracted most attention, less considered is what an expanding listed funds universe on ASX means for investors and advisers, and how it is shaping ASX as an investment platform. For retail investors, ASX is vastly different exchange compared to 1998. 

The democratisation of investing is perhaps the biggest benefit of listed funds. With as little as $500[10], an investor can buy an ETP on ASX that provides diversified exposure to the world’s largest 100 companies, or the top 200 in Australia, for example – in a single trade.

Increasingly, listed funds are becoming the entry point for people who want to get started in investing on ASX by owning a diversified basket of securities. 
 

Asset-allocation challenges

In 1998, retail investors mostly used ASX to invest directly in Australian shares, or to trade through options and warrants. Those seeking diversified share exposure could use one of 40 Listed Investment Companies on ASX back then.[11]

Typically, retail investors used unlisted managed funds (unit trusts) for global equities exposure. At the time, there were fewer ways to invest in sharemarket sectors or global investment themes because most unlisted funds invested by asset class and/or geography. 

Adding fixed-income exposure to portfolios meant buying government or corporate bonds in over-the-counter markets – a complex process for retail investors that required a larger initial investment. Adding cash to portfolios meant locking money way in bank term deposits, or earning low interest on cash management trusts.

Moreover, there was no single platform to invest in currencies, commodities or alternative assets, such as private equity funds that invest in unlisted companies. 

For many retail investors, a diversified portfolio meant owning a few Australian shares directly, a mix of listed or unlisted funds (for global equities exposure) and term deposits. 

Liquidity and transparency were other issues. Buying and selling units in unlisted managed funds could take days, and investors were never sure of the exact exit price for their units.

Moreover, because most managed funds at the turn of the century were actively managed, annual fees were higher.[12] There were fewer options to invest using low-cost funds, such as Exchange Traded Products.
 

Trends behind listed-fund growth

Several trends this century increased investor demand for listed funds on ASX. The first was the boom in Self-Managed Superannuation Funds[13]. Many SMSF trustees favoured do-it-yourself (DIY) investing and the simplicity of listed over unlisted funds. Trustees began buying and selling listed funds on ASX, just as they did with shares. 

In June 2012, Future of Financial Advice (FOFA) reforms banned conflicted sales commission to financial advisers and introduced a duty for advisers to act in the best interests of their clients.[14] That change led to more advisers recommending LICs, LITs and ETPs, which had previously been at a competitive disadvantage because they did not pay trailing commissions.

A move towards lower-fee funds was another trend. More investors embraced ETPs that typically had much lower fees than active managed funds. 

Technology was another factor. More investors began using online brokers and mobile devices, such as computer tables and smartphones, to transact and monitor their investments. Filling out forms to buy and sell unlisted funds, and waiting days for transactions to be processed, became antiquated. Investors wanted the convenience of buying and selling funds via ASX.

This problem encouraged ASX in 2014 to launch its mFund Settlement Service (mFund), which allowed investors to buy and sell unlisted funds through their broker, similar to trading shares. (more on mFund later in this essay)

Technology is especially important for ‘Next Generation’ investors (aged 18-24), who are contributing to a new phase of growth in ASX listed funds. In the ASX Australian Investor Study 2020 [15], 45 per cent of Next Gen respondents said they intended to invest in ETFs over 12 months and 35 per cent wanted to buy LICs.

Next Gen investors appear to be investing more actively than older generations[16]. Anecdotally, they are using ETFs for thematic investing, such as exposure to global tech shares, clean-energy companies and robotics. When asked about their first investment, 8 per cent of Next Gens said they used an ETP[17].

Finally, ASX has done much to promote listed funds (and unlisted funds available through mFund) and support product issuers. ASX publishes investment newsletters featuring commentary by product issuers, for retail investors and financial advisers. 

ASX On-Demand Webcasts and The Ideas Exchange Podcast provide further information for investors and advisers. ASX Investor Day, held semi-annually in capital cities, is a popular channel for fund managers to reach retail investors with education, market and product insights. 

ASX also runs the ASX Financial Adviser Day annually, ASX Lunch & Learns (for advisers) and produces the ASX Investment Products monthly update. This comprehensive report on all ASX-listed funds is available on the ASX website.
 

Benefits of listed funds

Growth in listed funds on ASX is helping solve longstanding portfolio construction and maintenance challenges for retail investors and advisers. 

Today, a retail investor can own Australia’s top shares through a single trade on ASX, achieving instant portfolio diversification[18]. Or use listed funds for exposure to sharemarkets in the United States or other countries, or to regions, such as Asia or other emerging markets. They can use ETPs to own large-cap or small-cap shares. 

Investors can use a variety of fixed-income ETPs to achieve asset allocations to government and corporate bonds in Australia or overseas, or to ASX-listed Hybrids. They can even allocate cash to their portfolio through a cash ETP.

Wealth accumulators can use ETPs to invest in a theme, such as cybersecurity, climate change, video games, electric-vehicle batteries and artificial intelligence. 

Income investors can use ETPs to invest in indices that are designed to include companies with potential for higher dividend yield and franking. 

Active investors can use ETPs to back their view on the Australian dollar, gold and other commodities. They can amplify that view through geared ETPs (which use leverage that magnifies gains and losses) or through ETPs that rise when Australian or US sharemarkets falls. 

Increasingly, investors are using listed funds to blend investment styles in portfolios, aiding diversification. For example, ETPs in their portfolio’s core (to replicate a market return) and active funds or shares as portfolio satellites (which aim to outperform a benchmark index).

Other investors are using smart-beta ETFs that have rules-based systems to select investments in the fund (and potentially deliver higher returns), or LICs and LITs that are actively managed. Alternatively, investors seeking active investment styles can invest in unlisted managed funds through mFund.

In real estate, investors can use A-REITs for domestic or global property exposure to office, industrial and retail properties. Or to niche properties such as childcare centres, self-storage facilities, petrol stations, convenience stores, and farms. 

Those seeking an infrastructure allocation in their portfolio could use ASX-listed infrastructure funds that invest in airports, toll road, electricity and gas assets, infrastructure-focussed ETPs or an LIC. 

Here is a snapshot of key developments in ASX-listed fund markets since 1998:

1. Exchange Traded Products 

After State Street Global Advisors launched the first ETFs in 2001, an important development was the launch of iShares[19] ETFs on ASX. Most were for indices over sharemarkets in other countries, or for global investment themes.

For the first time, Australian investors could gain index exposure to global shares indices via ASX, through iShares ETFs. They included the iShares S&P 500 ETF (ASX: IVV), iShares Global 100 ETF (ASX: IOO), iShares Europe ETF (ASX: IEU) and iShares China Large-Cap ETF (ASX: IZZ)

Vanguard, another leading global ETF issuer, launched its first ETFs on ASX in 2009. The Vanguard Australian Shares Index ETF (ASX: VAS), is now the largest ETF on ASX.[20]

In 2010, the first smart-beta ETFs were launched on ASX to enhance yield for income investors. They included the Russell Investments High Dividend Australian Shares ETF (ASX: RDV) and the iShares S&P/ASX Dividend Opportunities ETF (ASX: IHD). 

Another important development in 2010 was the arrival of BetaShares, an Australia-based ETF issuer. BetaShares is now the largest ETF issuer on ASX by number of products[21], and the third largest by funds under management.[22]

In 2012, Russell Investments launched the first fixed-income ETFs on ASX. iShares and State Street Global Advisors also launched fixed-income ETFs on ASX that year, providing more options for investors who wanted exposure to government and corporate bonds via ASX. 

In 2013, VanEck entered the ASX ETP market, launching several sector-based ETFs over Australian shares. For the first time, investors could gain index exposure to Australian bank stocks, for example, through the VanEck Vectors Australian Banks ETF (ASX: MVB)

Since then, the depth and breadth of the ASX ETP market has expanded rapidly. Recent trends include growth in smart-beta ETFs, thematic ETFs and Environmental, Social and Governance (ESG) ETFs that provide various levels of ethical and ESG screening of sectors and companies.

Growth in Exchange Traded Managed Funds has been another key development in recent years. Asset managers that are better known for unlisted managed funds have begun to make those funds available to investors via an ETP on ASX. 

Today, the market’s largest ETP by funds under management is the Magellan Global Fund – Open Class Units (Managed Fund).[23] (ASX: MGOC). 

Under this innovative dual-class unit structure, investors can access the Magellan Global Fund through open-class units that are quoted on ASX (MGOC) and trade close to the prevailing Net Asset Value (NAV) of the fund (due to internal market-making provided by Magellan.) An estimated daily NAV is published on Magellan’s website and the full portfolio is disclosed quarterly with a delay period of no more than two months. 

Alternatively, investors can choose closed-class units in the fund (ASX: MGF) that can trade at a premium or discount to the NAV. 
 

2. Listed Investment Companies and Trusts

LICs have a long history on ASX. The market’s largest LIC, Australian Foundation Investment Company (ASX: AFI), listed on ASX in 1928. 

Two important developments this century aided growth in LICs. The first was changes to The Corporations Act in 2010 that allowed companies to pay dividends as long as they are solvent.[24] This legislative change gave LICs more flexibility to pay dividends. Many investors buy LICs for their potential to provide a steady stream of franked dividend yield.

As mentioned earlier, the second change was reforms to the financial-planning industry that banned commissions paid to financial advisers by managed-funds providers, for new allocations. This removed an incentive for advisers to recommend unlisted funds over LICs.

The LIC market had a strong period of growth in 2014 and 2015 with Initial Public Offerings (IPO) for a number of Listed Investment Companies from well-known asset managers. Most of these LICs invested in global equities or small-cap Australian equities. This took the LIC market in new directions, given most existing LICs invested in large-cap Australian shares. 

The launch of the market’s first philanthropic LIC - the Future Generation Investment Company (ASX: FGX) – in 2014 was another highlight. Other philanthropic LICs include Future Generation Global Investment Company (ASX: FGG) and Hearts and Minds Investments (ASX: HM1). 

The listing of credit LICs between 2017 and 2019 was another development. The MCP Income Opportunities Trust (ASX: MOT), for example, provided exposure to direct corporate loans for real estate projects, as did the Qualitas Real Estate Income Fund (ASX: QRI). 

The Partners Group Global Income Fund (ASX: PGG) and KKR Credit Income Fund (ASX: KKC) provided exposure to private debt markets offshore.  

Another LIT, the Pengana Private Equity Trust (ASX: PE1) invests in private equity issued by global companies, enabling investors to build a portfolio allocation to alternate assets. Effectively, investors are using listed trust (PE1) to invest in unlisted companies via ASX.

In the past few years, the listing of absolute-return LICs, such as the L1 Long Short Fund (ASX: LSF), VGI Partners Global Investments (ASX: VG1) and Regal Investment Fund (ASX: RF1), was another trend. 
 

3. mFund

In May 2014, ASX launched mFund to help retail investors, SMSF trustees and financial advisers access additional asset classes that were not readily available on ASX at the time.

SMSF portfolios lacked diversification with almost two thirds of their assets allocated to Australian shares and cash.[25] ASX believed SMSF trustees and other direct investors would benefit from easier access to unlisted funds. 

mFund solved a recurring problem with unlisted managed funds: paperwork. Buying or selling units in an unlisted fund required completing a lengthy paper-based application – and for investors to be identified. In addition to this paperwork and certification, investors in unlisted fund faced delays between mailing forms and sending payment with the application or by BPAY.

mFunds are accessed via an ASX broker participating in the mFund service. The broker transfers information electronically and the investor, having been identified when setting up the broking account, does not need to confirm these details at each mFund transaction. They confirm their identity once at the start. 

The holder identification number (HIN) allows the investor to hold all investments accessed through ASX with that broker on that HIN – mFunds alongside ASX-listed shares, for example. Through mFund, ASX became a platform to combine unlisted and listed funds, and shares. 

Today, $1.69 billion of funds under management are held through mFunds [26] Many leading asset managers are foundation members of mFund. Together, they offer 239 unlisted managed funds – across a range of asset classes in Australian and overseas. 
 

4. A-REITs

GPT Group’s (ASX: GPT) 50th anniversary on ASX this year was an important milestone. GPT’s listing in 1971 paved the way for other Australian Real Estate Investment Trusts and an A-REIT sector worth $146 billion today.[27] GPT’s anniversary is, in effect, the 50th anniversary of the start of the A-REIT market. 

The A-REIT sector has made an important contribution over five decades. Together, the 49 A-REITs on ASX[28] have made Australia one of the world’s top 10 REIT markets.[29] They’ve enabled small and large investors to own part of office towers, shopping centres and industrial warehouses. A-REITs have also been a source of yield for income investors, over decades. 

Most of the market’s largest A-REITs, such as Goodman Group (ASX: GMG), Dexus (ASX: DXS),  Mirvac Group (ASX: MGR), Scentre Group (ASX: SCG) Stockland (ASX: SGP) and Vicinity Centres (ASX: VCX) listed in their original form[30] before 1998.

After the 2008-09 Global Financial Crisis, several A-REITs simplified their operations. They reduced debt, raised equity capital, and focused more on Australian property investing and less on global markets. Others wound back their funds management operations.

The A-REIT sector continues to evolve. New investment opportunities are emerging in storage facilities, childcare centres, hotels, farms, petrol stations, medical offices, retail supercentres, data centres, built-to-rent homes, retirement villages and cold stores. 

Known as niche-AREITs, these types of property trusts have been popular in the US REIT market, but less prevalent in Australia. That is changing as investors show more interest in owning property assets beyond the traditional office, industrial and retail sectors.

Examples of niche A-REIT listings in the past decade include National Storage REIT (ASX: NSR), Arena REIT (ASX: ARF) in early-learning and healthcare properties, Hotel Property Investments (ASX: HPI) in pub investments, Aventus Group (ASX: AVN) in retail supercentres, Rural Funds Group (ASX: RFF) in farm investments, and APN Convenience Retail REIT (ASX: AQR) in petrol stations and convenience stores.
 

5. Infrastructure funds

Access to listed and unlisted infrastructure funds (via mFund) on ASX is important for investors seeking exposure to large infrastruture assets in Australia and overseas. These include airports, tollroads, telecommunication networks, electricity, energy and water utilities. 

Seven ASX-listed infrastructure funds have a combined market capitalisation of $81.25 billion.[31] They include toll-road operators Transurban Group (ASX: TCL), and Atlas Arteria Group (ASX: ALX), Sydney Airport (ASX: SYD), and the energy utilities APA Group (ASX: APA), Ausnet Services (ASX: AST) and Spark Infrastructure Group (ASX: SKI).

Another seven unlisted infrastructure funds, some from Australia’s largest infrastructure managers, are available via mFund[32].  The Ausbil Global Essential Infrastruture Fund (hedged and unhedged versions) was a recent admission to mFund. 

These funds mostly invest in global infrastructure assets, enabling investors to include an allocation to Australian and offshore infrastructure in their portfolio, through a mix of listed and unlisted infrastructure funds. 

Other ASX markets provides infrastructure exposure. In LICs, Argo Global Listed Infrastruture (ASX: ALI) invests in listed global infrastructure assets. In A-REITs, the Charter Hall Social Infrastructure REIT (ASX: CQE) provides exposure to childcare centres and other properties in Australia and New Zealand.

Several ETPs provide exposure to global infrastructure indices. They include the VanEck Vectors FTSE Global Infrastructure (hedged) ETF (ASX: IFRA), the Magellan Infrastructure Fund (currency hedged) (managed fund) (ASX: MICH), and the Vanguard Global Infrastructure ETF (ASX: VBLD).  

More information on ASX Investment Products is available here.