mFunds – has the ship sailed?

It’s been a bit over 18 months since the launch of mFunds, the new ASX managed fund settlement capability. At time of launch there were great expectations mFunds could disrupt the platform market and help investment managers target elusive self-managed super funds (SMSFs).  So far the take-up has been well short of success.

ASX data to the end of October 20151, shows only 448 trades for the entire month. That’s less than one trade per week for each fund.  The traded value for the month of October was just under $8.5m and the total FUM raised across all mFunds over 18 months was just under $70m.

So, underwhelming by anyone’s measure.  However, as more providers get involved, volumes will increase. The question for most asset managers is whether there is a business case for participating.  The answer?  Not yet…

Growing involvement to change the game?

To be clear: we think mFunds is a great initiative.  Anything that opens up difficult channels such as SMSFs for fund managers should be applauded.  So, why is it failing?

  • It’s not because investors don’t like listed offers – look at the take up of ETFs and LICs for evidence of both direct and advised investors using the exchange to invest beyond direct equities; and,
  • It’s not because mFunds offers managed funds either – netflows into managed funds have picked up significantly and up across all sectors over the last 12 months.

The problem is that there is a demand block on the broker side. The promise of transacting funds through the exchange can’t be delivered until brokers connect to the service.

NAB recently announced it would participate with mFunds across all three components (broker, asset manager and registry services) by the end of 2015. Is this the boost mFunds needs? Probably not – NAB may be going it alone and doesn’t have the market share to have a big impact.

To remove the block, a critical mass of brokers must ‘connect’ to mFunds, but they are yet to do that.  It’s hardly surprising given the difficulty of presenting a business case.  So far:

  • The development cost of connecting to mFunds for brokers is reportedly up to $1 million
  • Even if brokers made a profit of, say, $10 per trade, the total profit pool is not even $5k per month at present.

It’s hard to see a business case for $1m in capital expenditure getting up on those numbers.

Has mFunds already been superseded?

Whilst mFunds has been languishing, a new type of listed product has been developed: the inelegantly named Exchange Traded Managed Funds (ETMF).  Magellan kicked off the category when it launched the Magellan Global Equities Fund (ASX Code: MGE) in March 2015.

An ETMF works by creating a listed version of an underlying unlisted trust by having the underlying fund act as a market maker on the ASX.

Since launch, MGE has grown to over $360 million in FUM, and took over three times the inflows and four times the number of trades in October than all of mFunds combined.  As you can see in today’s chart, it is taking regular netflows of ~$30m a month – a number most product developers only dream of.

MGE_Monthly_Netflow

K2 Asset Management has recently joined Magellan launching its ETMF – the K2 Global Equities Fund (ASX Code: KII) and taking just under $6m in inflows for October.  Not a bad start for a hedge fund in only its third month on the ASX, and already with FUM of almost $40m.

ETMFs are readily available via all brokers (they trade just like any listed security) and can be offered over a much wider range of investment products, so may already be on the way to replace mFunds.

What’s the course from here?

So far mFunds has been a failure.  While the inclusion of NAB is a good kicker, mFunds really needs another large player or two to come on board (think CommSec and E*Trade) before there will be any serious volume to talk of. In the meantime, asset managers are probably losing very little by not participating.

It will be more interesting to look at the opportunity offered by the ETMF structure and whether other managers also make a success of it.  Watch this space.

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1ASX Funds (Listed Managed Investments, mFunds and ETFs) Monthly Update – October 2015

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