Australian investors have become very competent in the use of domestic equities in investment portfolios and SMSFs.
This may be the outcome of a number of characteristics of the Australian equity market including the attraction to high yielding fully franked stocks, the ease with which and investors can access ASX via a broker and the transparency and certainty of holding investments via CHESS on a unique holder identification number (HIN).
But are investment opportunities reducing?
Taking the SMSF sector as an example, which is projected to grow 4 fold from $500 billion to over $2 trillion by 2035 (SPAA Macquarie research July2014).
Already SMSF trustees have chosen to hold $200 billion of the current $500 billion in investments that have been accessed via the ASX while sitting on cash and term deposits of another $155 billion. The questions;is this cash holding the ‘new norm’, being used as a ‘natural hedge’ to offset higher risk exposure to equities or a sign of uncertainty of where or what to invest in?
The answer is probably ‘yes to all’; as more SMSF trustees move into pension phase, liquidity and cashflow become more important, cash can be seen a safe offsett to risk and while I do need a greater return – if I do go elswhere, where will I invest my cash - back into the same Australian equities I hold or if not that, what else?
mFund - the new ASX settlement service for unlisted managed funds may be able to help
mFund is an innovative service from ASX that allows investors to choose to invest in selected unlisted managed funds using an ASX broker. It broadly follows the same process unlisted managed funds use today, in that an investor applies to invest a dollar amount in the fund – delivering cash first, the manager sets fund prices on a regular basis (more often than not daily), calculating the number of units (price divided into cash received) to which an investor is entitled.
However, there are significant differences.
By accessing an mFund via an ASX broker, the need to complete a paper application is removed as the required information is gathered using an automated service driven by the broker - sending electronic messages from investors to the manager, with the manager responding with details of when the investors’ units will be priced and delivered.
More red tape is removed from the process as a result of the broker having completed the identification of the investor at the time of establishing a broking account and setting up the investor’s holder identification number (HIN). Furthermore, units received using the service are held on the same HIN, alongside other ASX investments – shares, LICs, ETFs and so on, enabelling investors to have a single view of their portfolios.
Importantly, an invesor must receive a copy of the Product Disclosure Statement (PDS) for the mFund before they can invest and a record of this having happened be made.
Options available from mFund
The mFund settlement service launched in May 2014, with an initial 50 funds choosing to use the service. This number is expected to grow over coming months and into 2015.
Interestingly, the nature of the underlying assets in which mFund managers invest can provide investors with an opportunity to allocate funds to classes of assets that are not ‘naturally available’ or which provide an ‘active’ approach to investing as opposed to buying a share listed on ASX.
The range of assets available via an mFund include:
- Australian equity exposure to small, mid or micro cap stocks
- Fixed income
- Property securities
- International equities
- Mixed and balanced investments
Possible answers to cash questions
If investors are considering changing cash holdings, then adding one or more mFunds to a current portfolio holding may be a solution.
The ‘new norm’ for a cash holding, may be reduced to that level genuinely sufficient to cover cashflow needs for whatever period considered appropriate. The ‘natural hedge’ may also be achieved by moving to other asset classes such as fixed income or investing into other markets offshore. A higher return may also be achieved by spreading exposure across asset clases that lie between cash and equities.
Among the benefits of choosing mFunds is the ability to use a professional manager to gain exposure to asset classes where investors may not have the same level of confidence as they do with Australian equities. Add to this that the process starts and finishes with your broker, is electronic as opposed to mailing paper, the outcome provides a much more streamlined and timely way to access unlisted managed funds.