Here's why ASX mFunds are good for investors
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The mFunds service on the ASX has witnessed significant growth and carries many benefits for investors, including further diversification.
The managed funds settlement service on the ASX has experienced huge growth, with 161 managed funds signed up for mFunds at the end of June, up from 95 a year earlier.
The market is now worth $150.5 billion, up 227 per cent from a year earlier.
The mFunds service enables investors to buy and sell units in selected unlisted managed funds via the stockbroker or adviser you usually use to transact shares or other ASX products.
In particular, the service uses CHESS, the ASX electronic settlement system, where you can apply for or redeem units in a participating managed fund.
Once you buy your units, your holdings in these mFunds are held electronically and are linked to the same holder identification number (HIN) used to hold your other investments transacted through the ASX, such as shares.
The good news for investors is that no paper-based applications are required. mFunds is all "electronic," which means it's a much quicker application process than filling out forms to apply for units in a fund.
"It does add another way for investors to access funds and simplify some of the paperwork," says Alex Prineas, a Morningstar research analyst.
"If you already have an account to trade ASX securities, then you can use that for mFunds."
Ian Irvine, the ASX's head of customer and business development, said the main saving experienced by the investor is time.
"We estimate that for an investor, investing in a portfolio of 10 unlisted managed funds could take up to 20 hours of manual work," he said.
But with mFunds, "investors no longer have to complete lengthy application forms and post them into the manager to issue units ... Investors also don't have to worry about 'time out of market' waiting for their posted application forms to arrive at the fund managers for processing."
The desire to diversify has driven the strong growth of mFunds.
"Investors looking for further diversification within their investment portfolios are seeing unlisted managed funds as a preferred way to achieve this," Irvine says.
"We also see strong interest from financial planners who are very familiar with unlisted managed funds and are recommending mFunds to their clients to save time and money."
About 50 per cent of flows into mFunds are going into fixed income, with 35 per cent directed at global fixed income and 15 per cent at domestic fixed income funds.
The next two largest sectors are global and Australian equities.
"The equity funds we see funds flowing into are not your usual large-cap Aussie equity funds but those which focus outside the top 20 stocks or [those which] have a contrarian focus to selecting Australian companies," says Irvine.
Self-managed superannuation funds (SMSF) in particular may benefit from using mFunds.
To date, many SMSFs have had a strong home bias, opting to invest in large-cap shares, particularly in bank shares and mining shares, and in cash.
SMSFs have largely avoided managed funds. Over time, this may change as the mFunds service offers exposure to a broader range of asset classes, beyond a domestic equity focus.
However, with CommSec and Westpac's online broking arm not signed up with the mFunds settlement service, "that probably limits the uptake of mFunds because CommSec and Westpac are two of the largest online brokers in Australia," says Prineas.
CommSec says it may join mFunds at some stage and is reviewing its position.
"We are always looking to provide a full suite of investment opportunities for our customers. Participation in mFund is in our pipeline for review in due course," a CommSec spokesperson said.
BT's head of margin lending and online products, David Morrissey, said the Westpac group monitors demand closely for both St. George Directshares and Westpac Online Investing customers.
BT Financial Group looks after the online trading capability for the Westpac Group.
Morrissey says the group has "seen minimal interest for mFund funds. We have, however, seen continued demand for access to exchange-traded funds, which are growing at a rate of approximately 50 per cent per annum".
And with BT Financial managed funds and Colonial First State (and other Commonwealth Bank-owned) products absent from mFunds, and the well-regarded Magellan, the choice of funds is limited by this.
Magellan recently launched an actively managed trading managed fund (TMF), Magellan Global Equities Fund (MGE).
Along with TMFs, ETFs and listed invested companies are competitors to mFunds.
But those assets have the advantage of being listed on the ASX, so they are priced and traded constantly throughout the day "unlike mFunds, where investors see one price and one transaction opportunity each day," says Prineas.
But Irvine points out other advantages.
"While ETFs are generally passive funds which track either an index or a price, mFunds are actively managed with varying investment strategies," he says.
"ETFs generally provide the returns of the associated index or commodity less fees. However, mFunds try to outperform the index or market."
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Nicki Bourlioufas is a Morningstar contributor.
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