A- A A+

Buying listed investment funds

17 March 2014  |  Investing

Listed InvestmenstMany super trustees invest in in a managed fund, although often the fees are high, even when the returns are acceptable. But there is another option, which represents a method of diversification. A small number of fund ­management firms list their operating businesses on the ASX. They offer a way to invest in the ability of the funds to sell themselves. Returns for shareholders are based on how many funds under management there are.

According to the AFR, data collated by research house Morningstar shows that during the past three years, investors in many cases were ­better off investing in the head stock of the funds’ management businesses rather than in the unlisted funds.

Morningstar's analysis is based on performance data collected over three years. It measured the results produced by a $10,000 investment in the listed funds management company compared to that listed manager’s flagship unlisted fund, taking into account management, performance fees and dividend ­payments.

The stand-out performer was Magellan Financial Group and its ­Global Fund, which correctly identified the United States housing recovery. It grew funds under management so earned more in fees:

“In a short period of time, and with a less extensive investment track record, [Magellan’s] sales and distribution effort has seen FUM grow to a ­similar level to that of Platinum,” a Morningstar report comparing fund flows between the two noted.

Sixty per cent of Magellan employees have functions outside the investment team. Sixteen individuals in the company are responsible for distribution and 21 are in business support.

Platinum maintains a more low-key approach to marketing its funds.

“Platinum’s strategy to grow through gradual inflows and investment outperformance sees it derive much greater revenue and profit from its FUM, and in turn greater returns for its shareholders,” the researcher notes."

In theory, this shows that it is better to invest in a successful fund than buy units in that fund. This is the argument:

“One is a high octane version of the other. One is the underlying market and the fund manager’s investment ability; the other you are betting on is the ability of the fund manager to bring in substantial funds in aggregate,” explains William Spraggett, head of listed investments at Bell Potter Securities.

But of course what does better on the way up can do worse on the way down. Buying shares always has risks. The argument is that there is some protection on the downside because of funds' diversification, but that did not work especially well in the GFC (although nothing worked very well in the GFC).

What is clear is that investment advisers are unlikely to recommend it:

"Most investment professionals are reluctant to advocate that retail investors trade off investing in the fund manager’s stock with the manager’s underlying fund, for several reasons.
Firstly, a listed manager is unlikely to be covered by the dealer group’s approved product list and therefore offer the adviser protection in the case of an investment going bad.

Furthermore, there are too many variables to make a sound comparison from manager to manager. For starters, managers have multiple funds that will add and subtract separately from the listed company’s ­bottom line. For instance, BT Investment Management has funds invested in asset classes across the spectrum.

Magellan is an example of a listed funds manager with significant exposure to the performance of the underlying fund. This works both ways for shareholders of Magellan stock, which is tied more to the performance of the underlying fund than more diversified managers. Principals Hamish Douglass and Chris Mackay both appear in the list of top 20 shareholders in Magellan Financial Group’s 2013 annual report.

Also, some listed managers have agreements with distribution networks, giving them the capacity to generate superior funds flows than their competitors. BT Investment Management is more than 70 per cent owned by Westpac Financial Service followingWestpac Bank’s acquisition of BT Financial Group in 2002. Westpac has one of the largest network of financial advisers in the country.

However, ties to distribution through financial adviser networks might not always be a pathway to superior funds under management. Magellan has successfully managed to garner funds through its marketing network on the back of strong performance.

In 2013, Magellan took in almost $1.7 billion from its funds business, which is equivalent to more than 80 per cent of its 2012 asset base. Almost 60 per cent of the $22.8 billion Magellan managed at the end of this February was on behalf of investors outside Australia."

The ASX will launch its new mFund service this year. That will allow DIY super investors to have the electronic ­settlement of units in unlisted managed funds through the stock exchange for the first time.

The mFund service will connect investors to hundreds of funds previously only aggregated on the technology platforms used by advisers. It is a way of helping super investors invest in teh sector who do ont use a fianncial adviser.

Investors will buy units. The value will based on dividing the value of the underlying assets of the fund with the number of investors in the fund at the end of every day’s trading. The price of a share in a listed company will be determined by the market. That means the price will be subject to all the volatility as any other asset listed on the stock exchange.


Source articles

Similar articles from Investing

An innovative property option

 | 3/26/2014

Arthur NaoumidisDomacom is providing DIY super investors with a way to invest in specific properties, yet also diversify. It is an unusual option that may provide a way to achieve improved diversification.

Land gets dangerously expensive

 | 3/25/2014

Expensive LandMedian lot prices nationally have risen by over 400% over the past 20 years. And over the last decade there has been powerful growth in land prices. It should be a cautionary note for super investors contemplating diversifying into property.

Is crowd funding an investment option?

 | 3/20/2014

crowd fundingThe Federal government is reportedly becoming more interested in crowd funding as a way to get funding for start ups. Is this an option for diversification for DIY investors?

Seven megatrends that will affect investment

 | 3/20/2014

TrendsMegatrends, long term influences, determine the investment environment over the long term. They do not translate easily into investment strategies, but DIY super investors should give them careful consideration.

Westpac solid but unexciting

Broker reports editor | 3/19/2014


Westpac is one of the banks much favoured by DIY investors. Brokers think it is unexciting, but believe it is benefiting from a better context for financial services companies.



Subscribe to the Personal Super Investor weekly email to keep abreast of developments in SMSF law and investment markets. SMSF investors looking to improve investment returns from shares, property, cash or other specialised investments, will find the PSI weekly newsletter an invaluable resource.

Subscribe now »


The contents of this website are of a general nature only and have not been prepared to take into account any particular investor's objectives, financial situation or particular needs. Our content is not intended to be advice and must not be relied upon as such. You should seek independent advice tailored to your specific circumstances prior to making any decisions. Personal Super Investor does not provide financial product advice or recommend any financial products: Where this website or it derived newsletter/electronic publication refers to a particular financial product, whether it be within our editorial or a 3rd party advertising, advertising promotion or advertorial, then you should obtain a Product Disclosure Statement (PDS) relating to that product and consider the PDS before making any decision about whether to acquire the product. We also recommend that you should seek professional advice from a financial adviser before making any decision to purchase any financial product referred to on this website. We do not make any representation or warranty that any material on the Personal Super Investor website will be reliable, accurate or complete, nor do we accept any responsibility arising in any way from errors or omissions of our content or any content provided by any advertiser appearing the Personal Super Investor website. We will not be liable for loss resulting from any action or decision by you in reliance on the Material (whether editorial or advertising) on the Personal Super Investor website, nor any interruption, delay in operation or transmission, virus, communications failure, Internet access difficulties, or malfunction in your equipment or software. By using the site you acknowledge that we are not responsible for, and accept no liability in relation to any content contained on the site that you may use, including any other users’ use of the Personal Super Investor website in any circumstance. You use the Personal Super Investor website at your sole risk.