Magellan Asset Management seeded its new-style Exchange Traded Product (ETP), a listed-but-open-ended active global equities fund, with $50 million and enjoyed a net inflow of $13 million from investors on day one. Judging by the response, the fund is set to be emulated by many others.
Magellan started work on the product about 18 months ago with discussions with the Australian Securities and Investments Commission (ASIC).
A problem with ETFs, which are all passive in Australia, was that ASIC required monthly disclosure of holdings, which is no problem for an index manager but a worry for an active one. ASIC agreed to quarterly disclosure, up to two months after the fact. Magellan will actually better this with additional disclosures the same as it does with its traditional global fund, the strategy on which the new ETP is based, which is a quarterly list of top-10 holdings by size and a monthly list of alphabetically ranked top 10.
ASIC also agreed for Magellan to be the market-maker to enable to firm to hold a very tight price spread close to net asset value. Another problem with ETFs is that the market-maker’s interests are at least in-part commercial and they do not have the same vested interest in a tight spread because it may require more risk.
Because it is a global fund – stock ticker MGE – Magellan calculates an ‘indicative NAV’ at 9.30am each day, after overseas news is gathered. When the news is after overseas markets have closed – such as a big corporate action and currency movements – the manager estimates the impact through futures and other indicators to get as close as possible to the true NAV. When the ASX opens at 10am, Magellan makes a market which is updated every 15 seconds. Deutsche Bank acts as the transaction agent.
According to Frank Casarotti, general manager, distribution, MGE should particularly appeal to the broking industry, unadvised SMSF trustees and the platform market. “We think it’s a better solution. It’s more efficient and fairer for investors because it’s based on live valuations. We also didn’t like the potentially illiquid nature of some Listed Investment Companies (LICs) in a crisis. With our fund, the liquidity’s there too.”
LICs, a very traditional product which has been popular with self-directed investors for years, are closed-end funds and sometimes trade at significant variation from the NAV of their underlying portfolio. Also, the fund can only grow through portfolio returns or another capital raising requiring a prospectus. With MGE, the group nets off the trades at the end of the day and either issues new units or redeems, allowing further share purchases when the net trading is positive, as was the case on day one last Wednesday (March 4).
The benefit over the ASX’s mFund initiative last year, which allows applications and redemptions for managed funds through the CHESS broking system, is that there is intra-day trading. This gives investors greater surety of their price.
It is not the ASX’s very first ETP, however. There are now seven but the other six are either passive, by BetaShares, or a bond-based income fund, by Aurora Funds Management. By the end of last week, up to a dozen other managers had made inquiries of the ASX about the new market possibilities through ETPs.
Interestingly, ASIC is concerned that investors don’t confuse MGE with all the ETFs on the market and has requested the firm use the term ‘exchange-quoted managed fund’ (EQMF).
* Greg Bright is publisher of Investor Strategy News (Australia)