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Exchange Traded Managed Funds, tell me more

19092017 ETMFs

Exchange Traded Managed Funds, tell me more

Customer experience is vital in today’s competitive environment for the delivery of products and services. Just look at how Amazon has revolutionised the way products are bought, paid for and delivered to its loyal customers.

When we as an investment manager look at our customer (investor) experience in applying for an investment, it’s a far cry from being a straight forward or enjoyable experience. One needs to fill in lengthy paper based application forms, dig up tax file numbers, bank account details, wade through the Foreign Account Tax Compliance Act (FATCA) certification, then produce certified documentation proving your identification and any trust or company that you may be investing through. While the advent of platforms such as BT Wrap, Macquarie Wrap and Netwealth to name a few have made the process a little easier, they have mostly been the domain for financial advisers.

However, a recent development in the buying and selling of active managed funds has been the creation of the Exchange Traded Managed Funds (ETMFs). I try and explain some of the key concepts and questions relevant to this new type of structure below with a focus on the Montgomery Global Equities Fund (active ETMF), the strategy that we have made an application to the ASX for under the AQUA market rules with Perpetual Trust Services Limited acting as the Responsible Entity. This is not meant to be an exhaustive list but will cover some of the main points.

What is an ETMF?

An active ETMF is, most simply, a managed fund that is traded on a stock exchange such as the ASX. They are built like managed funds, but trade like shares, meaning that pricing is transparent and they can be bought and sold during any trading day just like ordinary shares. Active ETMFs share many similarities with exchange traded funds (ETFs) but have one key difference: ETFs are “passively managed” and aim to track a particular benchmark or index, whereas ETMFs are “actively” managed by fund managers with the aim of outperforming a relevant benchmark.

How liquid are units in the proposed Montgomery Global Equities Fund (ASX: MOGL) to be quoted on the ASX?

Under normal market conditions an ASX Quoted fund is liquid.  Settlement would occur under the usual ASX trading rules of T+2. In addition, by having an outsourced market maker, they usually have the obligation to provide liquidity to the ASX market. The active ETMF is also invested in listed assets, which means the underlying investments under normal market conditions are simple, unlevered and relatively liquid.

How can ETMFs benefit investors?

Active ETMFs:

  • Can be bought or sold via an exchange (such as the ASX) in exactly same way as buying a share or ETF.
  • Deliver easy access to active investment management capabilities, with the potential to outperform an index or benchmark.
  • Provide transparent intra-day pricing via the exchange – unlike traditional managed fund prices which are only set once per day or less frequently.
  • Can be managed and reported-on alongside all other broker holdings, making portfolio administration and tax reporting easy.
  • Offer differentiation – they generally invest into a diversified portfolio otherwise difficult for retail investors to access.
  • Don’t require any paperwork once a broker account has been established – no forms are necessary.
  • Require no minimum investment.

How will the fees differ from the existing unlisted managed fund?

Total management costs for MOGL will be the same as the current equivalent, the Montgomery Global Fund (which is an unlisted managed fund). In addition to the management costs, investors will incur fees from their stockbroker when buying and selling units in the ETMF. If, however, you apply for units in the initial capital raising period then no brokerage will apply to this amount. Once listed investors will also bear the bid-offer spread when entering and exiting their investment on the stock exchange. This is similar to what investors currently bear when they buy units in the unlisted Montgomery Global Fund.

How will you seek to ensure there is liquidity within the fund?

The Fund will have a professional and experienced firm act as ‘market maker’ to provide liquidity for investors during the trading day. The market-maker will provide bids/offers in the market, generally at a tight spread to net asset value (NAV). In contrast to closed-ended Listed Investment Companies (LICs), MOGL will be open-ended, allowing for units to be created and redeemed daily under normal market conditions. The combination of these two elements will ensure there is adequate liquidity and that the Fund generally trades around the NAV.

What is an iNAV?

For additional transparency, MOGL will disclose on the Montgomery Investment Management website an indicative net asset value (iNAV) which is updated regularly during the trading day. The purpose of the iNAV is to provide investors with an intra-day view of the ‘fair value’ for the Fund. The iNAV will be updated for foreign exchange movements in the Fund’s portfolio of stocks and will also be updated in respect of stocks that have live market prices during the trading day.

Will the performance differ from the existing unlisted fund?

We expect that performance will closely follow the equivalent existing unlisted Montgomery Global Fund, as it maintains the same investment strategy, investment process and substantially the same portfolio. There may, however, be small differences created by: 1) the fact that each ETMF acts as market maker; and 2) the size and timing of cash flows into the ETMF; and 3) performance fee payments may differ because of different inception dates between the ETMF and the comparable unlisted fund. These three factors may cause the two funds to slightly differ in performance.

Can investors switch their current unlisted Montgomery Global Fund holding into MOGL?

No. They are completely different trusts under separate investment vehicles. To switch, you will need to redeem your unlisted Montgomery Global Fund investment and then buy into MOGL via your broker (or vice versa). You should consult with your financial adviser before making an investment decision.

If you are interested in receiving timely information about the Initial Offer, please click the link below and register your details. Information packs are expected to be available in October 2017.

Register Your Interest

Disclaimer

This information has been prepared by Montgomery Global Investment Management Pty Limited (MGIM) ABN 62 204 878 533, as corporate authorized representative of Montgomery Investment Management Pty Ltd ABN 73 139 161 707 AFSL 354 564. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. The views expressed in the article are the opinions of the author at the time of writing and do not constitute a recommendation to act.  Any information referenced in the article is believed to be accurate at the time of compilation and is provided by MGIM in good faith. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.

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Scott joined Montgomery Investment Management in 2013. Scott joined the firm from BlackRock Investment Management, where he was Managing Director, Head of Retail Australia for 12 years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. Looks very interesting.
    Is there any policy around dividends and dividend reinvesting? What about franking? Will there be any relation to the underlying dividend payments?

    “MOGL will be open-ended, allowing for units to be created and redeemed daily under normal market conditions”
    How does this work, is there a maximum deviation from the iNAV that will be maintained? Is there a limit to the liquidity in extreme cases such as in a market downturn?

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