ETFs vs. managed funds: the Australian David and Goliath
In Australia, David is ETFs valued at only 3% of the Goliath of managed funds, yet when we report ETF flows and characteristics as representing the 'industry', we are missing the main game.
Legendary US basketball star, Wilt Chamberlain, died in 1999 but he is remembered for scoring 100 points in a single game and other individual records which still stand today. His intimidating physical stature at over seven feet tall and weighing 250 pounds and his aggressive approach to playing and living meant he was generally disliked across the NBA league, but he came up with the famous quote:
"Everybody pulls for David, nobody roots for Goliath."
There's a strange 'nobody roots for Goliath' in Australian funds management, as these numbers show:
- In the March 2023 quarter, the total managed funds industry in Australia rose $137 billion to $4,545 billion (ABS release 1 June 2023)
- On 31 May 2023, the total in Exchange Traded Funds (ETFs) was $143 billion (ASX and Cboe releases).
That's right. Goliath, or managed funds, rose almost as much in three months as the entire size of David, the ETF market.
At $143 billion versus $4,545 billion, David is 3.1% of Goliath. Yet everybody pulls for David, and the greater coverage of ETFs gives the impression that it is the dominant structure capturing market flows.
Put it down to the greater marketing commitment by ETF providers who not only promote their own funds but ETFs (or ETPs) in general, and their listed status gives them more exposure. The ease of investment in ETFs augurs well for their future growth.
Look at the chart below from the ASX, and there's the story at the moment.
Global equites and fixed interest both up about $6 billion in a year, which while good for ETFs, is small for managed funds.
The skilled ETF marketers give enthusiastic reporters (including from Morningstar) the numbers and the story angles, while Goliath sleeps in the background with nobody cheering him on.
For example, in last week's Weekend AFR, in its Smart Investor section, the lead story was 'The Income Option'. It started:
"Some exchange-traded funds are bringing the 'covered call' strategy normally used by institutional investors to everyday portfolios ..."
ETFs are credited with an innovation which the managed fund industry has offered to retail investors for 15 to 20 years. I wrote about it a couple of weeks ago, yet every example in the AFR article is an ETF.
Then two pages further on, the heading—which was also on the front page—was '11 ETF strategies for income investors', advising the many types of ETFs with an income focus "if you know where to look". It included a table of 20 high-yielding ETFs.
It would be easy for investors to read these articles and think the investment choices are covered, but there are far more in the managed fund space. Many of Australia's best fund managers have chosen not to operate in the listed space.
And while ETFs quickly introduce thematic and trend funds and generate much excited commentary (here comes robotics! invest in crypto! launch of cloud computing!), the money attracted to these special sectors is tiny and often flames out after an initial flurry.
So what's happening with Goliath? The ABS data shows these movements in asset allocations:
Most of the big flows are into large superannuation funds. Deposits and (domestic) directly-held shares have fallen over the last 15 years while the winners are overseas assets and unit trusts. The ABS reports:
"Total unconsolidated assets of superannuation funds rose $120.9b (3.5%) to $3,546.6b during the March quarter. Key movements were as follows:
- assets overseas rose $44.3b (6.7%)
- units in trusts rose $35.9b (3.0%)
- bonds, etc. rose $13.5b (15.6%)
- shares rose $13.4b (2.3%)
- deposits rose $10.9b (4.2%)."
(The ABS defines managed funds as institutions—superannuation funds, unit trusts, etc—which buy assets on their own account, plus fund managers which provide professional investment services, less any cross investment between fund managers).
The largest industry fund, AustralianSuper, alone holds twice the assets of the entire ETF industry and it's heading for half a trillion, according to its CIO, Mark Delaney.
The net growth into large super funds in the March 2023 quarter was $83 billion from many types of flows.
The annual contributions to large super funds are over $150 billion, as shown in the APRA data below.
And yes, to mangle history, the slings (and rocks) of outrageous fortune helped David to slay Goliath, according to the bible, and the Philistines fled the battleground. It may be a case of the winners writing the history books, but it will be a long time before David's ETFs reach anywhere near Goliath's managed funds.
While on this numbers game, it's sobering to realise the largest fund manager in the world, BlackRock, holds $13 trillion (yes, thousand billion) and Vanguard is at $10 trillion. That's where the real power over companies and markets lies.