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Despite the focus on ETFs, unlisted funds still dominate

In English, we say, “The squeaky wheel gets the oil.” The Chinese say, “The baby that cries the loudest gets the milk.” In other parts of Asia, they say “The nail that stands out gets pounded down.” In the Australian funds industry, the ‘wheel’ or the ‘baby’ or the ‘nail’ is Exchange Traded Funds, or ETFs – the noisy upstarts who demand attention as the centre of the investible universe.

Well done to them for creating this illusion, and their strong growth has reflected this high profile.

To the great credit of the issuers, the likes of Vanguard, VanEck and BetaShares decided a decade ago that if their ETF businesses were to grow, they needed to promote the benefits of the product structure and education first and their own brand name second. Investors learned about low costs and ease of access as if these attributes were unique to ETFs. And along the way, every milestone was breathlessly celebrated in the media as if they were the second coming.

Managed funds ceded profile to the ETF upstarts

Despite a fraction of the history of managed funds, ETFs have built a reputation that managed funds can now only envy.

A recent article in The Australian Financial Review, for example, shouted the headline, ‘Aussie ETFs set to crack 2 million investors in 2022.’ Firstlinks does the same, the first publication to note the ETF $100 billion milestone in February 2021. New fund listings are greeted like a cure for cancer.

In a 2022 outlook piece, CBA Economics discussed passive investing and the expectation that investors will be more risk averse in 2022. Then:

“the strong performance of diversified portfolios and listed equity Exchange Traded Funds (ETFs) may be difficult to replicate in 2022. As at November 2021, listed equity ETF market capitalisation was up 31.8% on the prior year.”

ETFs cleverly associated themselves with index or passive investing, and with that, cheaper costs. But managed funds were offering cheap index funds long before ETFs came along, and there are plenty of 'active' ETFs which are not cheap.

Managed funds ceded the space. When was the last time anyone wrote a headline about managed funds, such as when they ‘cracked’ $3 trillion (yes, trillion)? There is nobody promoting unlisted managed funds, and if media coverage is the gauge, it would be easy to think managed funds are an historical edifice. While individual fund managers devote their marketing budgets to the launch of their exciting new listed ETF, or their Listed Investment Company (LICs also have their own marketing association, LICAT), or their own brand name, managed funds chug away in the background.

Managed funds dominate the Australian market

According to ICI Global, in its Worldwide Public Tables for the end of 2021, the total assets in Australian unlisted managed funds were valued at about $3.5 trillion (ICI Global is part of the Investment Company Institute, representing funds globally with total assets of US$43 trillion or about A$60 trillion. This gives Australia a solid 6% of global managed funds).

The total size of Australian ETFs at the end of 2021 was … wait for it … start getting excited at the earth-shattering number … $134 billion.

That makes ETFs in Australia less than 4% of the size of the managed funds industry. Growing rapidly, tick, attracting new investors, tick, hitting the headlines, tick … tiddlers, tick.

LICs are well down the scale, suffering from their inability to pay selling fees to brokers and financial advisers, and where once they competed for size with ETFs, they hold only $56 billion or 1.5% of the size of managed funds.

Where is all this unlisted fund money sitting?

There is no public database of unlisted funds in the same way as offered by Australian exchanges, the ASX and Chi-X. To learn where the money is flowing requires access to institutional participants who process the transactions or monitor the markets.

Managed funds are the investment vehicle used by most financial advisers, who place their clients on platforms for ease of administration. For example, using the newer technologies of managed accounts, advisers can adjust the portfolio of all their clients in one transaction, greatly improving the efficiency of their back office. Managed funds flows therefore give an insight into what advised clients are doing.

Calastone claims it records 95% of Australian managed fund flows passing across its network, representing transactions between platforms and fund managers on behalf of investors. These flows are not the direct investments on a listed exchange and exclude ETFs.

Calastone reports that managed fund net inflows rose to $36 billion in 2021, up from $14 billion in 2020. The main gains were in equity funds, up 174% to $15 billion from only $6 billion in 2020. Investment flows were strongest mid-year but fell away by December. As ETFs have also experienced, international equity funds rose significantly, as well as small caps. Fixed income was doing well until inflation fears spiked.

The chart below shows the strong flows into equity managed funds in 2021, suggesting fears of their demise are exaggerated. The increase from 2019 is especially notable.

Net fund flows into Australian managed funds by equity category


Source: Calastone

At this stage, it is unlikely that 2022 will match 2021, as July 2021 was the strongest month for inflows which then fell each month as Omicron and inflation hit confidence. Both factors will reduce flows this year. The global switch is on for Australian investors, with two-thirds of investments in 2021 in overseas markets compared to only half in 2020.

Ross Fox, Head of APAC at Calastone said:

“Australians have saved in record amounts during the pandemic, stowing away a seventh of their disposable income in 2020/21, almost three times more than in 2019. They were rather cautious with all this cash in the first year of the pandemic. But by 2021, as a clearer exit route emerged in the form of vaccines, fund flows responded dramatically. The flood of capital into managed funds in 2021 is a direct consequence of both higher risk appetite and piles of ready cash on household balance sheets. They are not alone. Investors around the world have behaved in a similar way.”

Equity and bond flows dominate, with equities a clear winner.

Net fund flows by asset class, global

Source: Calastone

What are the Australian platforms?

In retail funds under management, according to Plan for Life, the top five administrators are the IOOF Group (boosted by the recent acquisition of MLC), BT Financial, AMP, CBA/Colonial and Macquarie. Each holds over $100 billion on their platforms. The rapid risers over recent years have been the managed account providers, netwealth, Hub24 and Praemium, while Mercer, Perpetual and Challenger are also in the Top 10. Most other providers were in outflow. Annual gross inflows have been steady at around $190 billion a year.

The Top 10 hold about $1.1 trillion (as at end September 2021) in retail managed funds, up from about $900 billion a year earlier, across wraps, platforms or master trusts. The wraps are the biggest winners and most of the money is superannuation. For traditional platforms, the surging markets in 2021 contributed most of their fund growth and they will fall if the markets take a hit. They hold large balances built up over prior years before the landscape became more competitive.

In wholesale funds under management, Plan for Life data shows total balances of $1.5 trillion in September 2021, up from $1.1 trillion a year earlier. Leading providers who feature for wholesale services to institutions and not retail include State Street, Vanguard, Victorian Funds Management, UBS, First Sentier, Pendal and BlackRock. A lot of this money is passive index, a business Vanguard is stepping away from for institutions. Combined with the changes as AMP and IOOF, the data is highly volatile with earnings and business changes affecting flows.

While it is sometimes difficult to reconcile different sources of data across trillions of dollars, the fact remains that managed funds (in their many formats) continue to thrive in Australia despite the bigger profile given to their ETF competitors.

What are some implications?

These numbers present opportunities for investors and ETF issuers.

ETF issuers know there is a massive runway for growth, as despite their high profile, they represent less than 4% of funds versus 25% in the US.

Investors should realise there is more choice among thousands of managed funds than the 250 ETFs, and with proper platform use, the extra cost can be minor and might be worth paying for the efficient platform functionality. Some platforms can only be accessed via financial advisers, involving an advice fee, but some allow direct participation. It can be an easy way to put all investments in one place for tax and administration purposes.

ETFs are a welcome and burgeoning part of the investing landscape, with ease of access, low cost (for index options) and their variety of sectors and themes. No doubt they will win market share from managed funds, especially as adviser numbers dwindle, but for many years, managed funds will reign - despite few people talking about them.


Graham Hand is Managing Editor of Firstlinks. This article is general information and does not consider the circumstances of any investor.


Simon Langdon
January 30, 2022

Managed Funds as they now exist for direct retail/wholesale investors are in their death throes. Firstly the ADMINISTRATION is archaic. Getting daily unit prices is possible on their websites - but it needs a concerted effort, unlike ETFs or LICs which can be viewed all day. Secondly and most frustrating is the clumsy way of adding or withdrawing - sending in forms but not knowing what price you are getting. I just hate it when I make an additional investment or withrawal and the unit price is different to what I expected. Thirdly, the delay in getting notified - usually 2 weeks to have confirmation. Fourthly getting your money out. Shares give me T2 while most large fund managers are T12-14. Finally, the websites of the large funds are fancy looking but functionally clumsy to use. Might appeal to the uninformed but not anyone with a brain who wants to find stuff or do stuff. Sadly, much of this could be fixed if they wanted to be transparent or help investors. * Make it easier for unit prices to be displayed for all funds on single sites like CommSec or elsewhere. But that might enable comparisons - oooh, scary. * Use an iNav approach for intraday NAV estimates. * Guarantee a buy or sell unit price AT THE TIME an ONLINE transaction is made. * Ensure funds are transferred to your bank account within 2 days not 2 weeks. Vale Managed Funds. Active managers are readily available as LICs or ETPs.

SMSF Trustee
January 31, 2022

Completely disagree Simon. Could go through every point one by one, but the first one will do to illustrate. Daily prices aren't a problem for most investors who don't even look at their portfolios monthly!
Suspect you are projecting a personal preference onto a whole industry.

January 31, 2022

Who in their right mind would pay a financial adviser 1% in FUM & then incur a similar fee to a fund manager (the investment that their advisor has put them into). Over 2% in management fees compounded annually over many years….no wonder why many Australians are in disbelief of what their investment balances look like when the near or reach retirement….highway robbery at its best….or should we say worst!

January 30, 2022

ETFs are managed funds. They are just an "exchange traded" variant of managed funds. It is nonsensical and misleading to "compare" ETFs with managed funds.

The correct comparison is between ETFs and UNLISTED managed funds.

Graham Hand
January 30, 2022

Thanks Dean for your unwarranted reference to 'nonsensical and misleading'. If you read the article, you will see that the managed funds data provided by Calastone excludes ETFs, so it is a comparison with UNLISTED managed funds, as you suggest.

January 30, 2022

Sorry Graham, I didn't intend to imply the analysis itself was in any way flawed. I think it is quite sound and also applaud the emphasis on correcting the widely held misperception that ETFs are all low cost index funds and unlisted managed funds are all high cost active. My "nonsensical and misleading" comment relates to the specific phrase "comparing ETFs and managed funds".

I note that the article does explicitly state UNLISTED managed funds in some places, and some of the commenters have followed this correct nomenclature as well. However this is not consistent throughout the article or the email newsletter referencing it. Some of the commenters clearly still don't understand that ETFs are in fact just a subset of the broader universe of managed funds, and their differentiating characteristic is not indexing or fees.

Language matters, because it fuels misunderstandings. ETF promoters are deliberate purveyors of this misleading language because it suits their commercial agenda. Finance professionals need to push back against it and insist on accuracy, rather than regurgitating ETF marketing spin the way most of the media does.

January 29, 2022

Our clients absolutely love their unlisted commercial property trusts. We had one in Melbourne bought out by the Singaporeans recently. Our clients were making 8.5% pa rental income, and achieved 100% return over two years (from buy in to being bought out) on capital returned. And this has happened several times before, over the past decade, believe it or not. Meanwhile the ASX200 ETF went nowhere over the past two years. Wakey wakey.

January 29, 2022

As part of a diversified portfolio certainly , and so do I own some unlisted property trusts.
The Australian Unity Healthcare property trust has been a stellar performer for over 15 years with double digit per annum returns.
But unlisted commercial property has its own risks particularly liquidity so only suitable for a minority of most people's portfolios.

Peter Thornhill
January 29, 2022

ETF's and Unlisted funds still suffer from the same fundamental drawback of a trust structure. This requires that all income, including capital gains, must be distributed at year end. Personally, having invested in unlisted during my time in the industry, I couldn't cope with the quarterly dividends of one fund fluctuating between 0 and over $13,000 without warning and another which normally paid a 3 figure quarterly dividend dropping over $17,000 in my lap. Naturally, when the fund went ex div the unit price dropped to account for the pay-out of capital. With the first example this meant that after 22 years my investment was still worth only what I had invested initially and all capital gain had been dropped in my lap and taxed whilst a top marginal taxpayer. Made tax planning impossible and after nearly 50 years in the industry this was one of the reasons I left.

January 30, 2022

Yep. And watching the unit price over years as a guide to performance doesn't help unless you can include the dividends received either through reinvestment, or accounting for them in your records. Sharesight helps in this regard.
The trade-off is LIC style investments which can smooth earnings, and give you just two nice simple 6 monthly franked dividends - but then you may not get your full value out of the investment if the shares are exited at a large discount to NTA unless you held for the long term.

Alistair Burch
January 26, 2022

My neighbours managed funds over 5 years - 5%
My SMSF with 90% ETF's - 11% over the same time.....

Graham Hand
January 26, 2022

Thanks Alistair but that is due to the performance of the investments, not the underlying structure. It would be easy to pick a group of managed funds which have done better over any time period than a group of ETFs, and vice versa.

January 26, 2022

I could also cherry pick and state that my largest unlisted managed fund holding, Smallco Investment fund, has returned 21% p.a over past 10 years and 14% p.a. over 20 years after all fees, easily outperforming the Australian index ETF

January 26, 2022

Unfortunately most platforms don't allow automatic reinvestment of distributions from ETFs and LICs / LITs, unlike unlisted managed funds.


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